Glut Forcing Some Energy Firms to Rethink Strategies
Prices for energy, particularly natural gas, have fallen in recent months, which is good news for the economy and consumers.
But it’s bad news for the oil industry.
Low crude oil prices and plummeting natural gas prices have thrown investment plans into question, put pressure on refiners that need to upgrade their plants and threatened the survival of some natural gas pipeline and production companies.
At the same time, demand for petroleum products continues to fall, even with economists talking about the recession coming to an end. So gasoline prices are declining even as the summer driving season reaches its peak. And profit margins are getting pinched.
As a result, some analysts and industry officials are saying that energy companies’ second-quarter earnings may not meet expectations.
“It’s a very distressed market right now,” said H. William Chaddock, a vice president and spokesman for troubled Columbia Gas Transmission Co.
That might sound like an understatement from an official of a firm whose stock price plunged $17.375 a share--more than 50%--this week to close Friday at $17.125 on news that the firm could lose $1 billion as a result of overpriced natural gas contracts.
But many industry insiders are downplaying the severity of the energy price falloff, arguing that it is a short-term phenomenon that won’t affect long-term earnings, capital spending or exploration and production plans.
Still, there’s no denying that low prices are proving painful.
Crude oil prices rose some last week, but they remain stuck at roughly the levels they were before the Middle East crisis began last summer. On Friday, light sweet crude oil for delivery in August settled at $20.23 per barrel, up 6 cents, in trading on the New York Mercantile Exchange.
More shocking has been the drop in natural gas prices.
On Thursday, contracts for natural gas to be delivered in July expired, closing at $1.167 per thousand cubic feet (mcf), an all-time low on the NYMEX. On Friday, August natural gas contracts closed at $1.195 per mcf, down 3 cents.
The reasons: ample supplies, two years of unseasonably warm winters and unusually successful drilling efforts in 1990, which more than replaced the total natural gas used by the nation that year, industry officials say.
The natural gas prices have hurt companies that were hoping for higher prices and the end of the natural gas “bubble”--the surplus of deliverable natural gas. But then, they’ve been waiting years for the bubble to burst.
Drilling is way off, industry officials said. Los Angeles-based Unocal Corp., 60% of whose reserves are natural gas, is taking a second look at its already modest capital spending and exploration programs in light of the current environment, according to spokesman Michael Thacher.
“Like everyone else in the industry, we’re feeling the pinch,” he said.
Similarly, a spokesman for Dallas-based Oryx Energy Co. said: “We are taking a second look at how much emphasis we want to put on natural gas exploration.” Up to now, Oryx has stressed such exploration in United States offshore areas.
Low natural gas prices exacerbated the problems at Columbia Gas System Inc.’s pipeline company, Columbia Gas Transmission Corp., forcing the parent to suspend its common stock dividend and default on a $15-million loan payment this week. The company, which transports gas to markets in the Northeast, is scrambling to renegotiate contracts with producers and lenders to avoid bankruptcy.
Analysts argue that Columbia’s problems are unique among pipeline companies. But low prices have also hurt independent producers of natural gas.
“We’ve heard producers saying they’re getting out of the drilling business,” said Ellen Beswick, publisher of the industry newsletter Natural Gas Intelligence. “It’s hurting companies’ cash flows. In the first six months of this year, we’ve had any number of companies reducing their budgets for capital expenditures for exploration and production.”
Mesa Limited Partnership, one of the nation’s largest independent gas producers, faced a forced auction of its gas reserves until the company--headed by by financier T. Boone Pickens--succeeded last week in refinancing part of its hefty $1.2 billion in debt.
Among the major oil companies, executives are less apocalyptic about the effect of current basement-level prices. Many say they have no plans to change long-term investment strategies, banking on an upturn in prices later in the decade.
The current economic climate “hasn’t caused us to make a strategic change of that sort,” said Tony Finizza, chief economist at Atlantic Richfield Co.
But such companies may be hurt by pinched refining and marketing profits because of lackluster demand for gasoline, robust refinery outputs and price wars.
Nationally, prices of self-serve regular unleaded gasoline have fallen for the past three weeks, to $1.162 a gallon last week, after rising steadily through most of the spring, the American Automobile Assn. reported.
With oil companies contemplating refinery upgrades to meet requirements of the new federal Clean Air Act, “a lot of people are putting money into a business that is contracting,” said Bernard J. Picchi, senior energy analyst with Salomon Bros. in New York. The outlook for natural gas prices is uncertain.
Hopeful industry officials say demand will grow as the new clean-air rules go into effect and concern grows about the environmental effects of burning coal and fuel oil to generate electricity.
But continuing high supplies threaten to keep prices low much longer than expected, said Beswick of Natural Gas Intelligence.
“Price projections for years in the future are also dropping,” she said.
Beswick cited one particularly dire projection--that prices will stay below $2 per mcf until 2005.
Falling Energy Prices
Crude oil, natural gas and gasoline retail prices are all at regulatively low levels. Crude oil prices have fallen to levels seen before Iraq invaded Kuwait on Aug.2, 1990. Natural gas prices have plummeted to record lows due to slack demand, high supplies and unseasonably warm winter weather in recent years. Gasoline prices have begun to slip as summer demand remains modest due to the recession.
