A: Nationally, natural gas prices have more than doubled
in the past three years, because the production of new gas supplies has not
kept pace with increasing demand. Natural gas is increasingly popular for
use in homes, businesses, factories and electric power-generation because
it is efficient, clean and reliable. This demand/supply imbalance has sharply
increased market prices over the past three years.
Q: Could you explain some of the market
factors that have led to rising natural gas prices at the national level?
A: Over the past few years, the construction and operation
of dozens of new, natural gas-fired electrical generation plants has increased
the overall demand for gas nationally. Unfortunately, the new gas production
has not kept pace with that increasing demand.
Q: Gas prices have been volatile the
past few years. Have we seen more of the same this year?
A: Yes. Natural gas is one of the most volatile commodities
traded on the New York Mercantile Exchange, or Nymex.
National market prices fluctuate widely, up and down, depending on such factors
as hotter-than-normal weather and hurricanes, which disrupted the production
and pipeline transportation of natural gas from the Gulf of Mexico. Also,
the cost of competing fuels, such as oil, also can impact natural gas prices.
Q: Does Dominion Hope earn higher
profits when the natural gas commodity costs increase?
A: No. The natural gas commodity costs, which account for
the majority of a customer's bill, represents costs associated with securing
natural gas for our customers. By state law, Dominion Hope cannot
earn a profit on these natural gas costs. When natural gas prices
rise, we pass along those higher costs directly to customers. Likewise, when
gas costs fall, we pass along those savings to customers.
Q: What can customers do to cope with
higher winter heating costs this year?
A: Dominion encourages customers to use energy more efficiently.
Before winter, customers can improve their home insulation and have their
furnaces and other natural gas appliances inspected by a qualified professional
contractor to maximize efficiency and comfort.
Dominion’s Budget Billing Plan provides a way for
customers to manage their gas bills to avoid seasonal fluctuation. Budget
customers pay a predetermined amount per month to even out their natural gas
bills. Dominion bases the budget amount on gas prices and customer usage over
the past 12 months, and current gas prices.
Q: Natural gas costs seemed relatively
low in the 1990s. What happened?
A: During the 1990s, consumers enjoyed natural gas at affordable
prices because available natural gas supplies exceeded customer demand. In
the year 2000, increasing demand and stagnant domestic natural gas production
had combined to increase prices sharply. Supply and demand are now in a very
tight balance and changes in the weather and economic activity have an almost
immediate impact on the wholesale price of natural gas.
Q: Natural gas is primarily a domestically
produced fuel while the United States has to import more than half of the oil
its uses. Oil prices never used to have an impact on natural gas prices. Why
have rising oil prices also led to rising natural gas prices now?
A: Historically, the factors that led to rising oil prices,
such as political instability or war in major production areas, such as the
Middle East, did not affect U.S. natural gas prices, because more than 90
percent of the natural gas used in this country was produced domestically.
Many large industrial customers can switch between natural gas and oil. In
the past, in times of rising natural gas prices, these customers would switch
to lower-priced oil, thus relieving demand and upward price pressure on the
natural gas market. Today, however, with oil prices spiking at prices of upwards
of $60 or $70 per barrel, many of these customers cannot afford to switch
to oil in the face of rising natural gas prices. Furthermore, to cope with
rising oil prices, large industrial customers who can switch between natural
gas and oil have been switching from oil to natural gas, which further increased
demand, and thus, prices, for natural gas.
Q: What impact does weather have on
national market prices for natural gas?
A: Weather can exert major impact on gas prices. For example,
this past winter, warmer-than normal weather in December 2004 helped lower
national market gas prices. For another example, sustained periods of colder-than-normal
winter weather in 2000-2001, and again in 2002-2003, resulted in sharply higher
national market natural gas prices and depleted utilities’ gas storage
inventories to historically low levels. In the past year, the industry has
replenished gas natural gas storage levels nationally, but the natural gas
production still has not kept pace with increasing demand on the national
market.
Q: How can the industry resolve the
current imbalance between natural gas supply and demand, to return prices to
more reasonable levels?
A: The solution to the current natural gas supply/price
crunch is to increase the supply of natural gas on the market. Boosting natural
gas production would moderate market prices in the short term, and result
in more reasonable prices in the long term.
Q: How quickly could new gas supplies
from new exploration and production activity flow into the national market?
A: Even with dramatic production efforts, it typically
takes six to 18 months to bring new wells into production and to bring additional
gas supplies from those new wells to the market.
Q: Why is it so hard for natural
gas producers to keep up with demand?
A: Producers are working hard just to maintain current
production levels. The 6,000 companies that produce natural gas in the United
States, including Dominion E&P, face some stiff challenges:
Many wells that have produced abundant natural gas for
years are becoming depleted. For example, during the last 10 years, average
depletion rates have climbed from 16 to 28 percent each year, according
to the Independent Petroleum Association of America. In simple terms, this
means drillers must produce additional volumes of one-fourth of existing
production each year just to stay even.
It is sometimes difficult and more costly to pull natural
gas from mature reserves. That’s why it’s important for producers
to be able to move into 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 in getting federal or state permits to start working on
bringing new energy supplies to market.
Q: What factors are preventing natural
gas producers from moving into new, potentially promising natural gas producing
areas?
A: Production in existing major onshore natural gas fields,
such as Texas, Oklahoma, Appalachia, and the major offshore areas of the Gulf
of Mexico has already peaked, and the industry must turn to new areas within
the United States, such as offshore areas in the eastern Gulf of Mexico and
off the East and West Coasts. However, federal regulations currently prohibit
any exploration and production activity in these areas.
Also, access to potentially rich natural gas deposits in
large portions of the Rocky Mountain region is severely restricted. These
current restrictions severely constrain the potential for increased natural
gas production in these areas.
Federal and state officials must take the lead in overcoming
a pervasive "not in my backyard" attitude toward energy infrastructure
development. As a nation, we must reevaluate current restrictions on access
to new sources of supply in light of technology developments that have reduced
the costs, uncertainty and environmental impact of gas exploration and production.
Q: Drilling more new wells can bring
more gas to market in the short run, but if federal regulators fail to permit
drilling in previously untapped areas, in reality, will we see a long-term solution
to the tight natural gas supply situation that has led to sharply higher prices
over the past five years?
A: No. Drilling more wells in established production areas
does bring more gas to the market, at least in the short term, but, ultimately,
these new wells just deplete existing production areas faster, and the new
wells are not as productive as the earlier wells drilled in these areas. It’s
like when you get a 32-ounce milk shake. If your friends want to share that
milkshake, they’ll put in their own straws. However, unless they also
buy a bigger milkshake in a bigger cup, those extra straws, like new gas wells
drilled in existing production areas, will just empty that original 32-ounce
milkshake faster.
Q: Until, and unless, new areas are
opened to exploration and production activity, what can the energy industry
do to fill the natural gas supply gap?
A: Until such drilling restrictions are removed, the industry
must turn to non-traditional sources of natural gas, such as imports of liquefied
natural gas (LNG). LNG imports, which are transported in tanker ships from
such sources as Trinidad, Algeria, Nigeria and Venezuela, are processed at
specialized ports, such as Dominion’s Cove
Point, Maryland, facility. LNG imports, which now account for less than
1 percent of U.S. natural gas consumption, could account for 10 to 15 percent
of gas consumption 15 to 20 years from now, if pursued aggressively.
