Long-Term Margin Pressure Foreseen

he prospect of “increasing efficiency,” T with all of its attractiveness, has a more serious side, as shown in recent data from both the federal government and the American Gas Association (AGA). The point is that by the year 2010, not only will the gas industry be more efficient, but also it might have to be. There just might not be sufficient money around to sup- port anything else.

i

Evidence to support this theory came as a result of analyzing statistics that were handed out at a Houston conference for another pur- pose. The AGA held the conference to show, among other things, how Department of Energy (DOE) statistics were coming more into line with the AGA’s. The exhibits included data comparing the DOE’S and AGA’s forecasts of supply (Exhibit 1) and price (Exhibit 2).

Supply Forecasts: Right On Concerning the supply forecasts, AGA Presi-

dent Michael Baly I11 noted that at least since 1983, the AGA forecasts had been higher and more correct. He noted that early in this period, a deficiency of DOE forecasts was very high prices in the 1990s and beyond, prices in the order of $12 a million BTUs in 1995 dollars (compared to the AGA’s $6 a million BTUs). In today’s energy markets, the DOE prices (or the AGA’s) would not only decrease usage but would practically eliminate it. But such prices have not happened, and the AGA has turned out to be more correct.

Additionally, showing the correctness of the underlying nature of the AGA’s supply fore-

Ro ber-t E. Willett

casts, the supply projections that the DOE has issued have recently come quite close to the AGA’s.

Price Forecasts: Good News, Bad News The price data at the meeting (Exhibit 2)

showed that for the year 2010, the federal price estimates were still generally higher than the AGA’s, although the discrepancy has been de- creasing.

Data Show Decreasing Margins However, that convergence was not neces-

sarily the important point of this exhibit. Possi- bly more important is that by using this data, it can be shown (Exhibit 3) that in constant dollars, not only do prices at the wellhead decrease, but also prices at the burner-tip de-

I

30 I

I I I I / I / I AGA-TERA DOE/EIA

Electricity Generation

Coutresy AGA

APRIL 1995 NATURAL GAS 0 1995 John Wiley & Sons, Inc.

19

1 Exhibit 2. Natural Gas Prices in 2010 Projections Made in 1991, 1993, 1995

12 I I

A.G.A.-TERA DOE/EIA

= Wellhead n Commercial rn Electric Utility Residential = Industrial

Coutresy AGA

1 Exhibit 3. Gas Price Decreases

d

1991 Outlook $4.21 $9.44 $8.24 $6.05 $5.01 1995 Outlook (2.64) (6.86) (5.50) (3.32) (3.17)

Decrease .57 $2.7 .73

crease, and they decrease even more. (The trend is the same for both the AGA and the DOE figures, although Exhibit 3 shows only the AGA figures.)

The data imply that much less money, in constant dollars, is going to be available to run the nation’s pipeline grid, including the grid of the LDCs. For example, in the residential sector, $2.58 a million BTUs is not going to be there that, in 1991, was thought to be available. The LDCs do not have to worry about $1.57 of this amount because the wellhead price de- crease accounts for it. Nevertheless, there is still $1.01 a million BTUs ($2.58 less $1.57) that the LDCs are going to have to scrimp and save to earn. This example uses residential sector figures, but the analogy is the same with all other sectors.

Leon L. Tucker, director, energy & eco- nomic modeling of the AGA, who is responsible for the model that puts out the data, confirmed the results. He said, “What we have seen hap-

pening over the years is sharp de- creases in the kinds of growth of delivery costs. . . . They have not been going up in aggregate but down in aggregate, and the whole relationship between revealed cost and delivered cost in natural gas has been changing. This is not good news for some of our companies.”

He said that the aggregate na- ture of the data did not show which costs and services that the pipelines and LDCs supply would decrease. “I hate to back into the data answer, but that’s what we have to do. It’s really not possible, with the kind of publicly available, government-gen- erated numbers that we have, to try and make that distinction.”

He also noted that this kind of analysis was not necessarily the purpose of his models. He said that the output reflects “assumptions that we put in regarding what supply and demand would be that produce the equilibrium. We don’t start out with a line of prices and set demand to reach those prices. We try to understand as best we can the sup- ply environment, the demand envi- ronment; put that in the model and

shake it up. The prices fall out. The prices are not our primary totals.”

Mix and Volume Variance Not Included Others at the conference showed how this

data did not necessarily mean that the pipelines and LDCs are going to make less money. They may just make less per unit. It was pointed out that volume is expected to increase in real terms 2 percent annually, compounded, throughout the period. Moreover, by keeping costs at a minimum and concentrating on uses that keep the load factor at a maximum, the industry keeps risk at a minimum. These advantages may make up for whatever lack of money, on a unit basis, may be coming into the industry.

20 NATURAL GAS APRIL 1995 0 1995 John Wiley & Sons, Inc.