The US natural gas industry has come to a bump on its road to a 30 tcf market by the end of this decade. It's the year 2001. Important political battles loom.
The challenge takes local shape in California, where electricity and natural gas are in short supply and, in the northern part of the state, weather is cold. Electrical power and gas have changed hands at astonishingly high prices. And assumptions are developing, not just in California, that 1) electricity deregulation doesn't work, and 2) there is not enough gas to satisfy demand.
A nationwide effort to correct these misapprehensions is in order. Hope for a 30 tcf gas market depends on continued expansion of demand for electrical power and continued preference for gas as the fuel in new power generators. Doubts about the wisdom of deregulation and about adequacy of gas supply work to the contrary.
California's mistakes
The gas industry, therefore, should lead efforts to point out that California's problem isn't deregulation but rather the state's peculiar version of it. Among other mistakes, California capped retail electricity prices at levels that encouraged consumption to grow faster than generation capacity, which is hindered by embedded resistance to power-plant construction.
The rest of the country needs to know that California's travails this winter don't condemn deregulation of electricity; they instead show how important it is to do the whole job.
More challenging for the gas industry than delivering that message will be restoring confidence in adequacy of gas supply. Here, the industry must play catch-up. For many years, it has been assuring the market-especially a cautious electric power industry-that it can keep up with demand growth. This winter's low inventories and soaring prices make those assurances look hollow. They have hurt the industry's credibility.
To overcome the problem, the industry will have to call attention to some vital distinctions. Gas-supply problems this year have to do with deliverability and infrastructure. Past supply assurances related to reserves and resources, which came under question after shortages resulting from regulation in the mid-1970s and an energy policy that assumed gas reserves to be in irreversible decline.
The industry must clarify the story. As it has asserted for years, the US faces no problem associated with the North American gas resource. It instead faces logistical challenges associated with the needs of the producing industry to rebuild and of the delivery system to adjust to new sources of supply and changing patterns of demand.
Delivering that message will help the industry's credibility, which is especially important this year. Many current deliverability problems have solutions at least partly dependent on politics. Chief among them is access to the resource. Close behind that are right-of-way and permitting issues for new pipelines. And an accommodating political environment is vital to construction of the 2,000 rigs that the National Petroleum Council estimates need to join the drilling fleet during 2000-15 to meet gas-industry needs.
What is more, the industry might see its interests whipsawed by broader political issues. Resistance to electricity deregulation has developed in some states in response to California's problems. The developing quagmire will encourage a federal solution. As long as the orientation remains deregulation, that might be proper.
But federal solutions always carry a hazard for gas: subsidies for the use of renewable energy in new power generators. To the extent uncompetitive energy enters the power market by that route, gas suffers. Because some measure of subsidy is inevitable, the gas industry's goal must be to keep damage to a minimum.
Bargaining chips
The task is especially challenging this year. A new president will be fighting a balky Congress for tax cuts. Favors for renewables will be handy bargaining chips. The gas industry thus might suddenly face more than token diminution of opportunity in its most important growth market. And its opponents will of course point to this winter's upsets and insist that gas can't meet higher levels of demand anyway.
The gas industry-from producers to pipelines to distributors-needs to be ready with a strong and consistent message. It faces confusion energized by anger over high prices. In politics, that combination can be a dangerous foe.
