[A-List] US economy: energy crisis

["Michael Keaney" <michael.keaney@xxxxxx>]

Natural gas shortage likely to be problem with too many solutions
By Sheila McNulty
Financial Times; Jun 26, 2003

It already has become known as "the other energy crisis", but unlike the
never-ending international tussle over oil, the current shortage of natural
gas in the US is, for the most part, a domestic creation.

After months of squeezed supplies, record low inventories and worryingly
high prices on the spot market - up 700 per cent over the past three years -
the US government has acknowledged that its longtime support for the clean,
cheap, plentiful and mostly domestic energy source has come at a
considerable cost.

Today Spencer Abraham, energy secretary, will convene an emergency summit of
the National Petroleum Council to address the natural gas shortages that
could cost industrial and commercial consumers dearly. Earlier this week Mr
Abraham said the US was "not out of the woods yet", even with US natural gas
inventories improving from their record low winter levels.

The problem for Mr Abraham will not be lack of a solution emerging from the
summit, but too many solutions. Dennis Eklof, executive managing director of
Global Insights Energy Group, an economic research and consulting firm,
expects numerous controversial ideas to be presented.

The key question, he says, is "whose ox gets gored in the short term".

For instance, the government could open for exploration and drilling the
estimated 40 per cent of the potential gas resources on federal lands
currently closed or severely restricted. But it does so at the risk of an
environmental, and indeed political, backlash.

The same risks would complicate the relaxation of emission controls from
coal-and oil-fired power plants, letting them produce more energy to cover
the shortfall.

Moreover, such a move would cripple companies that have started building or
completed new gas-fired power-production facilities (with federal
encouragement in many cases). Demand for their expensive power will fall
sharply, leaving them without the income to pay the heavy debts incurred to
build in the first place.

Companies have spent more than $100bn (£60bn, ?87bn) on new gas-fired power
plants in the last four years alone, notes Andrew Weissman, chairman of
Energy Ventures Group, an energy information technology company. Defaults
could be the death knell for such energy companies, many of them still
struggling in the post-Enron sector.

The US could also speed permits to import liquefied natural gas (LNG). There
are now only four terminals to receive LNG; Robin West, chairman of PFC
Energy, the Washington DC-based industry consultants, says they suffer
bottlenecks and contractual issues.

More than 30 new terminals have been proposed, he says, but the US
government, and individual states, have been slow to develop a permitting
process, and no communities want an LNG terminal nearby, for fears of
explosions and accidents.

The US is far from exhausting all its natural gas reserves, even on
unrestricted land. Still, many of the companies that can afford to produce
this gas have gone abroad for cheaper and more easily retrievable sources.

Indeed, it may be too late, even with incentives: many companies are by now
firmly entrenched abroad, and making a profit from LNG.

"I don't think there is a single solution," says Charif Souki, chairman and
CEO of Cheniere, a producer now seeking three LNG permits. Not surprisingly,
Mr Souki believes importing LNG is the fastest way to build up US supplies.

The only guaranteed short-term solution is conservation - never a popular
choice among US gas users, even as companies have begun promoting energy
efficient products such as air-conditioners.

But in the short term closures may be inevitable. A top concern at today's
emergency summit also will be the long-term economic damage of industrial
flight: big gas users are moving operations abroad, where the energy supply
is cheaper.

Others will simply continue to suffer at home. "If we have a really hot July
and August and a cold winter, we could see significant industrial closures,"
Mr Eklof says.