Long-term contracts are returning to the U.S. natural gas industry, which many experts say is a sign that the “gas bubble” may be coming to an end.
In recent years, pipelines and marketers have sold most of their gas on a short-term basis because falling prices and ample supplies gave buyers little incentive to seek long-term deals.
But industry experts say that gas consumers now believe the end of the “gas bubble"--the industry’s term for an oversupply that has existed since the early 1980s--is finally at hand, so they are looking to lock up guaranteed supplies.
“We expect that in 18 months to two years, 75% of the gas sold will be sold under some kind of long-term contract,” said John Esslinger, president of Enron Corp.'s Enron Gas Marketing division. Enron is the largest gas pipeline operator in the United States.
“Long term” in industry parlance means an agreement covering several years or more. At present, Esslinger said, only about 30% of the industry’s sales are made under long-term contracts.
These days, most gas is sold on the spot market, where agreements may be as short as 30 days, industry experts say.
Enron Gas Marketing has signed eight long-term contracts in the past year, the latest being an agreement to provide San Francisco-based Pacific Gas & Electric Co. up to 100 million cubic feet of gas a day for 10 years, Esslinger said.
William Hederman, vice president of the natural gas division of consulting firm ICF Inc., said there was a definite move toward long-term deals, but the trend was still in its early stages and therefore difficult to quantify.
Hederman said his firm predicts that the gas oversupply could end as early as this winter. If not then, it should be gone sometime in 1990 because low prices have caused drilling activity to dwindle and supplies to diminish.
At the same time, natural gas demand has increased and is expected to continue to do so, Hederman said.
Enron Chairman Ken Lay said U.S. natural gas demand should be about 18 trillion cubic feet in 1988, up from 16 trillion cubic feet in 1986.
Long-term contracts became a major source of contention in the early 1980s, when the gas industry was partially deregulated, making the market vulnerable to more dramatic price movements.
Reflecting weaker oil prices, spot gas prices plummeted while contract prices remained high, resulting in a wave of bitter negotiations and lawsuits as buyers tried to get out of their contracts. This year, gas has been selling for $1 to $2 per thousand cubic feet, compared to peak of $10 at the beginning of the decade.
However, these days pricing on the long-term contracts is more flexible. At a recent meeting of the International Assn. for Energy Economics, several participants said long-term contracts are tied to economic indicators such as the price of crude oil. As the indicators change, so do the prices paid by buyers.
Esslinger said the return to long-term contracts is healthy for the industry because guaranteed future delivery provides much need stability.
But he added that the spot market will not disappear because there will always be both buyers and sellers who prefer it.
Long-term contracts have particular appeal to gas users that do not have the capability to switch to other fuels.