ENERGY OUTLOOK - DALE STEFFES WELLHEAD GAS PRICES TAKE ENERGY ANALYSTS BY SURPRISE

ENERGY OUTLOOK - DALE STEFFES WELLHEAD GAS PRICES TAKE ENERGY ANALYSTS BY SURPRISE

Most energy analysts never had any clue that wellhead natural gas prices would be declining for the last two years. Natural gas prices this year are about 40 to 50 cents a thousand cubic feet below most expectations. For the first three months of 1995, wellhead prices averaged $1.57 per thousand cubic feet in 1995 versus $2.08 per thousand cubic feet in 1994.

For all of 1995, natural gas wellhead prices will probably end up in the $1.60 range, down from $1.83 in 1994 and $2.03 in 1993. Using the rounded annual domestic consumption of 20 trillion cubic feet, the 25-cents-a- thousand-cubic-feet decrease in wellhead prices means the domestic producers will receive $5 billion less this year for their production.It is doubtful whether the natural gas analysts today can figure out what caused gas revenues to be this much lower. What is truly amazing is that the natural gas industry analysts still don't know how the industry really operates today. The short-term market for natural gas is becoming more and more efficient, while the long-term market is becoming less efficient.

What the industry badly needs is a reliable Economic Model for Marginal Natural Gas Wells. Producing uneconomical natural gas wells distorts the market for the rest of the industry in the short term.

At this wellhead natural gas price, probably 40,000 natural gas wells have become uneconomical and should be abandoned. There are about 275,000 gas wells in the United States. But the pro industry pundits say we need to keep these wells in production to maintain potential natural gas reserves for the future, but economics would say it is unpatriotic to operate the wells at a loss.

It seems every time the producer sector complains about low wellhead natural gas prices, the industry regulatory infrastructure is modified and the prices become even more unfavorable for the producer. Maybe the best thing the natural gas producers could do is to stop asking for regulatory help.

REVIEWING THE CHANGES

In formal problem analysis, the first thing that needs to be reviewed is all recent industry operational changes. In the past two years, the top things that come to mind include the following:

* Deregulation of natural gas-gathering systems.

* Changes in natural gas futures trading: increased hours, new exchanges.

* Many states have recently granted tax and regulatory relief for stripper wells.

* Some states are talking gas production allocation.

* Consolidation of the natural gas marketers, increased use of hubs.

* More efficient short term market due to better communications, computers.

* Better geological and geophysical tools, improved drilling tools and methods.

* Production from deeper offshore waters.

* Increased natural gas imports.

Each of these need to be individually and collectively investigated to determined their effects on the market.

Actual natural gas production costs have a very wide variance in the United States.

Most natural gas producers are small and have to accept a net back form of pricing for their natural gas. They are forced to take what the marketers offer.

The larger gas producers generally have natural gas production costs below the market price and therefore are willing to continue to produce, even at the lower prices.

Combined, these two factors force too much gas on the market, driving the price down.

DEREGULATION DISTORTS SUPPLY

One of the newer events is deregulation of the gathering systems. This is causing distortion in the supply because more prolific wells have multiple distribution outlets for their gas production. This essentially makes the gas deliverability greater, forcing gas prices even lower.

The new mode of operation for storage was defined in the EIA's recent report, "The value of Underground Storage in Today's Natural Gas Industry." Storage overall makes natural gas more deliverable at the needed times, which also lowers the overall cost of natural gas.

Storage of natural gas works best with an integrated system, which was the pre-636 system. The gas industry is no longer integrated, but segregated into many parts.

Some of these gas storage developers have the concept that they will make a windfall with storage. They could be in for a huge surprise. Instead, why not have a "paper" storage game plan, similar to the "paper" refineries using the futures oil market?