10.26.04 Frequently asked questions about natural gas market trends, Winter 2004-2005 by American Gas Association How many homes are heated with natural gas? Natural gas is America's most popular home-heating fuel, heating more households than all other energy forms combined. In all, 52 percent of all heated U.S. households have natural gas heat. Of the remainder, 31 percent heat with electricity, 9 percent use fuel oil, 6 percent use propane and 2 percent use wood, The nation's 66 million natural gas customers have ridden a roller coaster of price swings in recent years. What's happening? Natural gas is increasingly popular for use in homes, schools, businesses, factories and electric power-generation plants because it is efficient, clean, and reliable. However, natural gas production has struggled to keep pace with demand. As a result, the market price of natural gas reflects an extremely tight balance between natural gas supply and demand. The wholesale price of natural gas was relatively stable during the 1990s -- around $2 per thousand cubic feet (Mcf) -- because plenty of natural gas was available for purchase. Since 2000, however, natural gas prices have risen and sustained themselves at $4 or more due in part to the tight market balance, increased use of natural gas to generate electricity and public policies that have made it increasingly difficult for energy producers to keep up with consumer demand. Natural gas prices remain quite sensitive to weather, to a limited extent in terms of natural gas supply (such as a hurricane that may affect production in the Gulf of Mexico) and far more so in terms of natural gas demand (such as cold weather that increases usage for home-heating). In fact, weather is often the biggest factor in how much residential customers pay for natural gas during the winter. What is the outlook for natural gas prices this winter? The U.S. Energy Information Administration (EIA) said in its Winter Fuels Outlook (October 2004) that the spot price of natural gas averaged $5.80 per thousand cubic feet (Mcf) in 2003, and estimates it is expected to average $6.10 in 2004 and $6.18 in 2005. (Spot and wellhead prices for natural gas do not include the costs of transporting gas via underground pipelines to consumers.) This chart shows that natural gas spot prices have risen and become more volatile since the 1990s: (prices in dollars per thousand cubic feet, based on spot price at the Henry Hub) Source: U.S. Energy Information Administration, Short-Term Energy Outlook, October 2004 The term "spot market" refers to a market in which natural gas is bought and sold for immediate or very near-term delivery, usually for a period of 30 days or less. A spot market is more likely to develop at a location with numerous pipeline interconnections, thus allowing for a large number of buyers and sellers. The Henry Hub in southern Louisiana is the best-known spot market for natural gas; for example, natural gas futures traded on the New York Mercantile Exchange (NYMEX) are based on the Henry Hub price. The "wellhead" price of natural gas reflects its value as it comes out of the ground, before any processing or transportation occurs. What does this mean for residential customers during the winter of 2004-2005? According to the U.S. Energy Information Administration (EIA), the cost of heating a home with all major forms of energy will rise this year, however natural gas will be consumers' best home-heating value. Here is EIA's forecast of the cost of heating an average home from November 2004 to April 2005: Natural gas (Midwest) = $ 1,003 (+15.3% from 2003-04) Heating oil (Northeast) = $ 1,223 (+28.4% from 2003-04) Propane (Northeast) = $ 1,396 (+21.6% from 2003-04) What steps are utilities taking to manage natural gas price volatility? Utilities want what their customers want -- an ample supply of natural gas at affordable prices. And consumers love natural gas, however they do not like surprises. So natural gas utilities take a number of actions to stabilize natural gas prices and help consumers deal with fluctuations in their energy bills: Underground storage -- Many natural gas utilities (including the Metropolitan Utilities District, Omaha) purchase natural gas during warm-weather months, and store it underground for use on cold winter days. About 15-20 percent of the natural gas consumed during the winter comes from storage. Putting natural gas in storage helps utilities provide reliable volumes of natural gas to meet customers' needs. In addition, storage is often a way to hedge against potential run-ups of prices on winters' coldest days, instead of purchasing gas supplies on the daily winter spot market when prices can be high, utilities purchase gas for storage at lower cost during the summer and pass those savings on to customers. Hedging -- More than half of the states allow utilities to use financial tools such as futures contracts and weather risk insurance to stabilize natural gas prices. Prior to 1995, few natural gas utilities used such financial tools. By the 2003-2004 winter heating season, 70 percent of the gas utilities surveyed by the American Gas Association used financial instruments to hedge at least a part of their gas supplies. Contract terms -- Just as homeowners shop around for food and household items, gas supply managers obtain their gas supplies from a variety of sources and under different contract terms. Billing plans -- Most utilities offer balanced-billing plans that allow customers to spread their natural gas costs over many months, which makes it easier for people to handle winter heating bills. How do you bring natural gas prices down? You can reduce demand, increase supplies or do both. With demand for natural gas projected to increase nearly 40 percent by 2020, reductions in demand (through energy efficiency and fuel-switching) may help ease prices, but it is clear that natural gas supplies must increase. It is in consumers' best interest to do so. During the 1990s, consumers enjoyed natural gas at affordable prices because available supplies of natural gas were greater than even peak demand. Supply and demand are now in a very tight balance, and changes in the weather or economic activity have an almost immediate impact on the wholesale price of natural gas. More supply = lower, more stable prices. Congress is moving toward passage of national energy legislation that would help stimulate additional natural gas production. What is the impact of natural gas price fluctuations on the U.S. economy? Energy is the lifeblood of our economy, and natural gas meets one-fourth of the United States' total energy needs. Natural gas is the backbone of American manufacturing, used to make steel, glass, chemicals, textiles, automobiles, food and many other products. Higher natural gas prices put America at a competitive disadvantage, since natural gas costs less in many countries. Last spring, Federal Reserve Board Chairman Alan Greenspan warned that the natural gas supply crunch is "a very serious problem." He urged lawmakers to take steps to promote construction of more terminals where natural gas can be imported in a liquefied form via tanker ships. Why is it so hard for natural gas producers to keep up with demand? The 6,000+ companies that produce natural gas in the U.S. face some stiff challenges: Many wells that have produced abundant natural gas for years are becoming depleted. The number of producing gas wells has tripled since 1971 (from approximately 100,000 to more than 300,000) however, production has declined -- a clear indication that many existing natural gas basins are getting tired. It is sometimes difficult and more costly to pull natural gas from mature producing areas. That's why it is important for producers to be able to move to fresh supply areas, and use the best technologies to find and produce more natural gas. Even when producers hold valid leases, they often face months of delays and red tape when getting federal or states permits to start working on bringing energy supplies to consumers. What can be done to alleviate the price crunch? Unfortunately, options are pretty limited for the next few years. Efforts that can be taken in the short-term include: Increase supply -- Even a marginal increase in natural gas supplies could help dampen price increases.  One of the best short-term options is to increase imports of liquefied natural gas (LNG). Currently, LNG meets a small (3 percent) but important part of U.S. natural gas needs. Licensing and building more import terminals is vital during the next few years. In the meantime, policy-makers should take steps to enable production companies to increase production from traditional and non-traditional natural gas supply areas. Use energy more efficiently -- Encouraging natural gas customers to use energy more efficiently can help, too. Before the winter, consumers can take steps such as replacing older furnaces with more efficient models, insulating or replacing windows, installing programmable thermostats or adding insulation. While efficiency alone can help, it cannot solve the problem on its own. Additional natural gas must be produced to keep up with significant increases in consumer demand. Expand low-income energy assistance -- In anticipation higher winter heating bills, Congress should increase funding for the Low-Income Home Energy Assistance Program (LIHEAP). At its current ($2 billion) funding level, LIHEAP assists only one of every five eligible households. Most LIHEAP beneficiaries do not receive welfare or other forms of public assistance. Instead, they typically are working, retired or disabled persons with below-poverty income who receive $200 per year, on average, to pay toward a natural gas, fuel oil or electricity bill that averages $1,000. More than half of LIHEAP beneficiaries use natural gas heat. What long-term steps can be taken to ensure that natural gas supplies are there when customers need them? Congress must pass a national energy strategy plan that aligns proper stewardship of the United States' abundant natural gas supplies with the increasing consumer demand for energy. One important action that Congress took in October 2004 was voting to encourage construction of a pipeline for bringing natural gas from Alaska's North Slope to customers in the lower-48 states. Other legislation the American Gas Association has urged Congress to pass would: Encourage producers (especially independent producers, who typically have only 15-20 employees) to bring forth more supply. Promote expansion of natural gas utility pipelines, in anticipation of growing demand for energy by homes, schools, businesses, etc. Increase funding for the Federal How-Income Home Energy Assistance Program. Provide tax incentives for use of innovative, energy-efficient natural gas technologies, like fuel cells. For more information, please read the American Gas Association's report, Avoiding the Wild Ride: Ways to Tame Natural Gas Price Volatility (November 2003), at http://www.aga.org/wildride. For a printed copy, call 202.824.7207. An analysis of the policies needed to address the mismatch between growing demand for natural gas and supplies of it is contained in the AGA report, From the Ground Up: America's Natural Gas Supply Challenge (December 2002). For a printed copy, call 202.824.7207. To view From the Ground Up electronically, go to: http://www.aga.org/FromtheGroundUp. For monthly updates on natural gas supply, demand and prices, view the U.S. Energy Information Administration's Short-Term Energy Outlook, at http://www.eia.doe.gov/steo. How to Measure Natural Gas 1,000 cubic feet (1 Mcf) = 1,027 Btus (British thermal units of energy) 100 cubic feet = 1 therm (approximate) 1,000 cubic feet (1 Mcf) = 10 therms (a measurement of heating value also called a "dekatherm") 1,000 cubic feet (1 Mcf) = 1,027,000 Btus of energy 1,000 cubic feet (1 Mcf) = Enough natural gas to power an average home (heating, water-heating, cooking, etc.) for 4 /12 days. 1,000 cubic feet (1 Mcf) = In volume, equal to the space in a 10' x 12' x 8' room. 1 million (1,000,000) cubic feet (1MMcf) = 1 billion (1,027,000,000) Btu 10 million (10,000,000) cubic feet = Quantity on which a typical NYMEX natural gas futures contract is based. 1 billion (1,000,000,000) cubic feet (1 Bcf) = 1.027 trillion Btu 1 trillion (1,000,000,000,000) cubic feet (1 Tcf) = 1.27 quadrillion Btu (called "a quad") Click here to go to the top of this page

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