New coalition warns of gas supply crunch due to unwarranted price volatility

WASHINGTON, May 7, 2002 — A newly formed coalition of natural gas and electric utilities and consumers, oil and gas producers and energy service companies, cited a recent U.S. natural gas reserve study in warning that unwarranted price volatility is having a very damaging effect on natural gas supply, pointing to higher prices for consumers again this year.

The report, issued April 23 by the American Gas Association (AGA), entitled “Preliminary Findings Concerning 2001 Natural Gas Reserves,” estimates between 103 percent to 154 percent of U.S. gas reserves were replaced last year.

“We all must be very careful not to fall into a false sense of security; as a result of unwarranted price volatility, U.S. gas supplies are very much at risk,” said Arthur Corbin, president of the Coalition for Energy Market Integrity and Transparency (EMIT) and president and general manager of the Municipal Gas Authority of Georgia. “A careful reading of the AGA report reveals that the top 30 companies that hold half of U.S. natural gas reserves did not add enough reserves in 2001 to replace production, even though the average price they received for their gas was over $4.00 per thousand cubic feet, well above historical averages.”

Private investment banker and energy industry analyst Matthew R. Simmons, Chairman and President of Simmons & Company International, cautioned that the AGA report “could create a very false sense that things are well in natural gas just as the country’s daily supply is poised to drop by what could be a genuinely tragic surprise.”

Pointing to the rising influence of speculators in the gas and electricity markets, Corbin said, “Unwarranted price volatility, promoted by those in a position to exert market power, is destroying the nation’s natural gas production infrastructure, as evidenced by a decline in the number of rigs drilling for gas from a peak of 1,068 in July 2001 to a low of 591 in April 2002. This huge decline in new gas wells comes at a time when natural gas prices are 50 percent to 60 percent above historical levels,” he said. “This lack of supply response at these higher prices clearly shows that producers have no confidence in the natural gas market. This lack of confidence is directly related to the issue of unwarranted price volatility.”

Corbin said, “The purpose of our coalition is to achieve some balance here. Healthy, vibrant and liquid markets require lots of participants and good transparency. However, when speculators — and not producers — receive the benefit of higher wholesale and retail prices, those higher prices do not act as a stimulant to production. Whether it’s a regulated exchange or an electronic trading platform, there must be sufficient transparency to provide early warning of manipulative practices and to reduce unwarranted price volatility.”

Simmons said, “Every American should now be aware that the exploration and production industry embarked on the greatest drilling boom for more gas supplies in U.S. history during 2000 and 2001, shattering the prior record of gas wells completed in 1981 by over 1,000 more wells — yet daily gas supply stayed flat. The drilling boom peaked at the end of last summer. Drilling for gas has now dropped 45 percent, which is just starting to be felt in daily gas production. By the time the country experiences the full impact of this drilling collapse, daily supplies could drop by 10 percent or higher.”

Corbin said, “Whatever 2001 reserve replacement turns out to be, 2002 will likely be much worse. Volatile, unpredictable gas prices have caused U.S. gas producers to slash their budgets, and the drilling rig count this year is averaging 656, versus 939 in 2001.”

The Coalition for Energy Market Integrity and Transparency is a nonprofit organization whose mission is to reform energy markets to ensure their fairness, transparency and openness in order to provide adequate, reliable and affordable energy supplies for America.

Coalition members include: American Public Gas Association; American Public Power Association; Apache Corporation; Batesville (Indiana) Water and Gas Utility; Cairo (Illinois) Public Utility Company; Chambersburg (PA) Municipal Gas Department; City of Loretto (Tennessee); Florence Utilities (Alabama); Gloster (Mississippi) Municipal Gas System; Halliburton; Harrisburg (Arkansas) Water & Gas System; Horton Highway Utility District of Rutherford, Williamson & Marshall Counties (Tennessee); Huntingburg (Indiana) Gas Division; Louisiana Independent Oil and Gas Association; Middleborough (Massachusetts) Gas and Electric Department; Municipal Gas Authority of Georgia; National Rural Electric Cooperative Association; Noble Drilling; Norwich Department of Public Utilities; the Public Energy Authority of Kentucky; Pulaski (TN) Natural Gas System; Schlumberger; Smyrna (Tennessee) Natural Gas System; Town of Utica (Mississippi); and Texas Independent Producers and Royalty Owners Association.

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