Oil and Gas:

NGSA President Skip Horvath looks for solutions to sky-high natural gas prices

Natural gas prices hit record highs this week, trading upward of $14 per million British thermal units on the New York Mercantile Exchange. As a result, federal officials and industry analysts say consumers will face expensive home heating bills this winter. Skip Horvath, president of the Natural Gas Supply Association, weighs in on whether the White House or Congress can do anything about the high prices. He also explains why lawmakers should pass legislation that would allow states to opt out of an offshore drilling ban and get more supplies to the market.

Transcript

Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining us today is Skip Horvath, president of the Natural Gas Supply Association. Skip thanks a lot for being here.

Skip Horvath: Brian thanks for having me.

Brian Stempeck: Your group had an event last week talking about what we can expect with the winter heating season coming up in terms of the natural gas markets. Tell us what you guys had to say.

Skip Horvath: That's correct. Last week we told the American public that the good news is that natural gas will be there for them this winter as we'll have reliable service. The bad news is that the prices will be higher than last winter.

Brian Stempeck: Now of course we heard yesterday that there was a, or last week, that natural gas prices hit a record, near $14. Can we expect that to continue? And I know that some people are saying that home heating prices could be close to 70 percent higher than they were last year.

Skip Horvath: After every natural disaster, in that part of the country, in the Gulf of Mexico, you have an uptake in natural gas prices very often. And the reason is a lot of supply has to be taken off while we, for safety reasons, take down the rigs, stand the facilities down and do our inspections and we put them back online. During that period, when you take supply off the market, the price goes up. Luckily enough, because this is a shoulder season, that is not hot, not cold, for most of the country, there's not a lot of demand for natural gas right now. So although the prices are high the good news is that we do expect them to come down and it is temporary.

Brian Stempeck: How much of an effect is this having? Right now is a time when the industry typically is starting to store natural gas to prepare for the heating season coming up ahead. Has that affected how much gas is being stored?

Skip Horvath: Well you're right Brian, the storage factors extremely important. The hurricanes will not affect how much gas is stored. In a sense gas is stored first before some other use, if you think of it that way. It's a competitive market out there, but storage operators know their responsibility to keep those storage stocks full and they do that every year. We are expecting a full, above 3.2 BCF, that's billion cubic feet, of storage by the end of the October, beginning of the heating season.

Brian Stempeck: Now go over for us exactly what impact the hurricanes had on natural gas supplies. We know a lot of the rigs are still shut down. Have you had a chance yet to kind of gauge what the impact was?

Skip Horvath: Well we have a little bit more of a handle on Katrina's effects than on Rita's, of course, at this point. I want you to understand, this was a devastating one two natural disaster punch. We have not seen anything like this before, certainly in my career, and I'd venture to say in the last 50 to 60 years. We are recovering from it. It is taking a little more time. We have a lot of experience dealing with hurricane damage and repairs to our equipment. Ivan, last year for example, took off a lot of natural gas supply and it took us through March of 2005 to get it back online. We can expect a similar kind of reaction to Katrina and Rita as a combination hurricane.

Brian Stempeck: All right. Senator Domenici had mentioned this week that not only are natural gas prices high, but there could even be a possibility of a shortage. Do you think that's realistic?

Skip Horvath: No, I do not believe that a shortage is likely. To me a shortage means people who want gas or need gas can't find it. That is not in our outlook. We are saying that gas will be there, the price will adjust to make sure that happens.

Brian Stempeck: Now how high do you think prices might get? We already saw them at $14. Do you think it's possible they could go even higher than that?

Skip Horvath: Well we don't, NGSA does not predict prices. Those who do however, the government and a few private agencies and corporations, have suggested an $8-$11 range. Again, the numbers you're seeing now are due to a temporary shortage because of natural disaster and shouldn't be taken to be long range. Can they spike higher than that in the event of a cold snap? Yes. And whether they will or not entirely depends on the weather.

Brian Stempeck: Now one idea that's been suggested, kind of in some backroom talks, nobody really wants to go on the record about this, is the idea that Congress does have the power to say that we maybe should not be using natural gas for power generation. Instead keep it for consumers, keep it for other industries that need it. It's kind of an off the record thing you hear from some lobbyists. Do you think that's a reasonable idea for Congress to do, if in fact gas prices go too high?

Skip Horvath: We think that's a terrible idea as a price response. What that does, that's market interference and it says that gas cannot go to those who value it the most and that's just wrong.

Brian Stempeck: Is there a point that prices would get to though that would force that to happen? If we saw prices spike to 16, 18, $20, would that kind of thing be more realistic?

Skip Horvath: No, we do not believe so. We believe that that kind of emergency response is good only when there is a true emergency, a national emergency, the president declares it and he can invoke his emergency powers for that kind of allocation. But price increase is not that kind of reason. That's not an emergency.

Brian Stempeck: What about some of the industries that are coming out right now though and saying that these prices are having a huge impact on them? I know that there's been some rumors lately about Alcoa saying it might have to move some facilities out of the country because prices are so high. If that in fact is happening doesn't some kind of drastic action like this need to be taken?

Skip Horvath: Well commerce has a terrible term for that, it's called demand destruction and that does go on in commodity markets when commodity prices go up. That is happening for some natural gas consumers right now. But that's the market reacting. Those who are moving offshore can do it cheaper elsewhere and if they can then they should. So that is not, again, not an emergency, not a reason to limit natural gas use artificially.

Brian Stempeck: Now we have to talk about gas prices a little bit. Do you think we're ever going to see gas prices back in the $4 to $5 range again? I mean we've been at 14, where do you expect them to settle down the long run? You mentioned may be between 8 and 11.

Skip Horvath: Well even eleven for this winter is what some people are saying for an average and, again, those are their predictions not ours. As far as the highs and lows of natural gas we've seen everything from down to a quarter, back in the '70s, up to, in the California era of 60$-even in Chicago, $60 and so, for short periods of time. So the swing of natural gas prices is immense. So it really doesn't, the notion of the bands, that upper and lower are important, I think I want to cool that down a bit. That's not really so critical as the average overtime, because swings will occur in commodity markets.

Brian Stempeck: Now you mentioned that the idea, you don't agree with the idea of taking natural gas away from power generation. But in the short term, if prices are spiking this winter and you have consumers being really hit in the pocket but by that, what do you see as the options for Congress and White House?

Skip Horvath: What Congress can do to help out is change the federal policy on getting more gas to the country, both domestically and from foreign sources. So open up the Rockies for example, open up, I don't mean park lands, I mean I mean non park lands, areas that the federal government owns. Offshore is a good example. We know that the commerce committee voted to allow states to opt out of the moratorium offshore. We have the natural gas, Alaskan Project, the pipeline project, that's expected to come down. That one's actually, the Congress did everything they can there. That's just a question now of the business being put in order. And LNG, we have that as a resource, so all these resources can come in. The best thing Congress can do is open up more lands domestically.

Brian Stempeck: But are these short term solutions? I mean if you're talking about consumers being affected by prices in the next couple of months, what good does it do to have a natural gas project going forward two years from now?

Skip Horvath: Well as far as short term fixes there probably are none for this winter. I know it would be nice politically to be able to say you can do this or that for this winter, but the bottom line is we should've done those things years ago, as we've been urging for many years.

Brian Stempeck: Now you mentioned that the House Resources Committee yesterday, or last week, had a markup talking about the idea of allowing states to opt out of the offshore drilling ban for natural gas. This is something that's been talked about for the last few years as the energy bill moved forward in different shapes and forms. How realistic do you think that is? Have things change so much after hurricane Katrina that we might see that as a possibility of moving through?

Skip Horvath: Well hurricane Katrina and Rita may have added a little bit of an impetus to it, but we thought things were moving in that direction anyway. Prices were already up over the summer, over last winter, last summer, just on the basis of the tightness of supply and demand. The hurricanes added to that tightness and added to the impetus, but we think things were moving in the direction of Congress being pushed and urged to open up those lands anyway.

Brian Stempeck: Now there's basically two paths moving forward in the resources committee, you had this thing from Congressman Petersen talking about just lifting the offshore ban altogether. And then a little bit more moderate proposal from Chairman Pombo talking about the opt out. Which of those do you think is the best path forward?

Skip Horvath: We are still reviewing both of those options right now. It's not clear to us which is better.

Brian Stempeck: Do you think either of those really does have the votes though? I mean Peterson's proposal, when it was suggested to the energy bill as an amendment, only got 157 votes in the House. That suggests that it will probably be dead on arrival in the Senate. So do you think something like that could ever get the votes to succeed?

Skip Horvath: I think that over time the American public is going to insist that we do something to have gas prices rationalized a little bit better.

Brian Stempeck: What is that solution then? I assume you have some kind of, one of the bills that you're supporting right now or something that you're lobbying for. It must be one of those bills.

Skip Horvath: Well, again, we're still, these things all are real time happening, so we have to constantly assess where we are. We are looking forward. I mean we would like to have some sort of opt out by the states who are out of the moratorium. If there are some other options out there to come up we might support those instead. But the point is, really, the big point is to open up those lands. We have to fix that problem as soon as possible.

Brian Stempeck: Now Senator Domenici is also, he had taken a tour down in the gulf facilities, seeing what's happening down there. He's going to be having a hearing in the near future of that natural gas prices. What do you expect the Senate to come up with on this side? We've already seen what the House is working on. Have you heard what the Senate might be working on?

Skip Horvath: Actually we have not heard what the Senate, as you pointed out, there's an awful lot of activity in the house right now and that's where our focus is. But we hope to work with the Senate soon on that and we hope that, we expect them to be supportive.

Brian Stempeck: Now who specifically in the House and Senate are you targeting on this? We have a number of lawmakers who might be for this kind of thing, say in Virginia, Senator Warner, might be for lifting the offshore drilling ban. But when you come down to Florida, Senator Bill Nelson has said this is something he could filibuster. I mean how do you deal with something like that?

Skip Horvath: Well, again, that's just sort of the normal, you have to deal with everybody in the House and the Senate. So it's not that we're focusing on any one or two people. Obviously Mr. Pombo and Mr. Barton are critical, but we're really addressing a lot of the states and their constituents right now.

Brian Stempeck: All right. Skip, final prediction from you. This year, by the end of the year, will we see something come from the House and Senate, finish up? Or are we going to see the same old stalemate on natural gas as we have in the past?

Skip Horvath: Yeah, well I think my predictions on that are probably as good as the weatherman on the weather, but I do think we're going to see something relatively soon because I think the American public is going to be putting a lot of pressure on Congress after they see the bills this winter.

Brian Stempeck: All right. Skip thanks a lot for being here today.

Skip Horvath: Brian, thank you very much.

Brian Stempeck: I'd like to thank our guest today. That was Skip Horvath, president of the Natural Gas Supply Association. I'm Brian Stempeck. This is OnPoint. Thanks for watching.

[End of Audio]

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