State Enjoys a Reprieve as Natural Gas Prices Drop

Is it safe again to turn on the pool pump and fire up the gas grill?

For consumers and businesses whose recent energy bills have soared with the price of natural gas, the answer is yes--for now.

Falling as quickly as they went up, gas prices have returned to more typical levels in California and nationwide after soaring to once-unthinkable record highs only seven months ago.

In addition, the premium that Californians pay for gas above the national price--which widened dramatically late last year amid the state’s power crisis--almost has evaporated. Market prices for natural gas in California are only slightly above those in Texas or Louisiana.

All of which is welcome relief for gas users, whether they are running massive gas-powered electricity plants, lounging in backyard hot tubs or cooking dinner on the kitchen stove or backyard grill.

Southern California Gas Co. today is slashing its rates for residential and small-business customers by 48%, the largest monthly decline since the division of San Diego-based Sempra Energy began making monthly adjustments to its rates four years ago.

The new rate (before the gas company adds its delivery charges) will be 27 cents per therm, down from 52.1 cents in June. A therm equals 100 cubic feet of gas, and a typical Southern California household uses about 600 therms of gas a year.

Prices are expected to start climbing again soon, as more natural gas is needed to handle the summer’s air-conditioning needs (and thus higher electricity consumption) and the winter’s heating demand. But analysts expect gas costs to fall far short of their levels of last year.

“I do think we’ll see prices higher than they are today,” said Charlie Chambers, marketing vice president at Calpine Corp., a San Jose-based electricity producer with more than a passing interest in where gas prices are headed: By 2006, it will become by far the country’s largest user of natural gas, its plants expected to account for 10% of all U.S. consumption.

But a return to last year’s peak prices “would really surprise me,” he said.

A confluence of temperate weather, increased conservation, stepped-up gas production, the slowing U.S. economy and a marked change in gas buyers’ purchasing habits this year has driven prices lower lately, analysts said.

So too has a drop in demand for gas among electricity plants, especially in California, where the mild weather is lowering power prices, if only temporarily, and reducing the need to run gas-fired power plants at peak production.

And there’s another factor: With Congress and federal regulators intensifying their probes of some producers’ alleged manipulation of prices in California and the West earlier this year, a psychological side effect may be prompting suppliers to limit their price markups lately, some observers suggested.

The price of gas “at the Southern California border has disintegrated just over the last week and a half,” said Scott Speaker, editor of Natural Gas Week. “It just so happens that as the problem in Washington has started to really heat up, California has started to really cool down.”

Gas prices in California still remain slightly above the national average, a fact analysts mainly attribute to tight pipeline capacity in the state--that is, only so much gas that reaches the border can be shipped throughout California.

But that spread between California and national prices has narrowed dramatically.

The difference has shrunk to “about a buck,” Speaker said, referring to Thursday’s prices of $3.18 per million British thermal units in Louisiana and $4.18 in California.

That’s down sharply from more than $10 per million BTUs on the national level when prices peaked in December, and an eye-popping, record $56.54 per million BTUs at the Southern California border. (One million BTUs is roughly equal to 10 therms, or what a typical California home uses in five or six days.)

Setting aside the allegations of price manipulation, analysts said a key reason prices rose so high is that many power plants and other commercial customers held off buying gas last fall, figuring they would wait until prices fell back. But prices kept rising, creating panic buying among those users and driving prices through the roof.

The situation was exacerbated in California by an explosion that shut down a major gas pipeline, as well as the state’s continuing power crisis, as electricity generators with gas-fired plants boosted production to keep the lights on. Gas-related woes didn’t stop there, as an exceptionally cold winter in California compelled consumers to use more to heat their homes and businesses.

But the scenario is different this year. The mild weather so far means power plants are burning less gas. Gas supplies have been swelling nationwide. And utilities and energy firms are “packing away as much gas as they can early in the season”--storing gas they have bought at steadily lower prices, said Robert Christensen, an energy analyst at investment firm First Albany Corp.

All those events mean the prospect of more record gas prices this winter “is very much diminished,” said Marshall Adkins, an analyst at investment firm Raymond James & Associates in St. Petersburg, Fla.

The one wild card in all of this is weather, Adkins said.

“If summer weather turns out to be substantially cooler than normal,” he said, then gas-fired plants needed for air conditioning “will not kick in and gas prices will continue to languish through the heat of the summer.” On the other hand, prices could surge if it gets abnormally hot.

“The lack of hot summer weather [so far] combined with the aggressive storage build has greatly reduced, although not eliminated, the potential for late-summer price spikes,” said Donato Eassey, an analyst with Merrill Lynch & Co.

Talk of a temperate summer nationwide sent natural gas prices tumbling again Friday on financial markets. Gas for August delivery fell as much as 22.5 cents, or 6.9%, to $3.055 per million BTUs on the New York Mercantile Exchange, the lowest price since May 8, 2000.

And as winter approaches, there shouldn’t be a repeat of the pell-mell market conditions that sent prices soaring last year, analysts said.

“The players in the market will go into the winter more comfortable with the level of gas they stored, so there won’t be the amount of panic buying” seen in 2000, said Speaker of National Gas Week.

The abrupt drop in gas and electricity prices in California lately is a stark illustration of classic market conditions, Calpine’s Chambers said.

When prices soared for both commodities, “consumption in California dropped,” he noted, and that in turn helped replenish supplies and drive down prices.

But he and other industry observers cautioned that natural gas supplies inventories have risen only modestly, less than 10% year over year.

Even though there has been a sharp increase in the number of drilling rigs used to extract gas, it’s going to be several months before their production is reflected in supplies, they said.

In the meantime, prices could jump again.

“We are still in a very tight natural gas market,” Adkins said. “We have more gas on hand going into the winter than we did last winter. Does that mean we’re home free? Not at all.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Bubble Bursts

After soaring to unprecedented heights in December, prices for natural gas in California have plummeted and are now near the national average. Here are prices at the pipeline junction at the California border with Arizona, which are considered a bellwether of the state’s costs:

Price per 1 million BTUs

Thursday: $4.18

Source: Natural Gas Week