They’re already coping with competition as a result of NAFTA and other free trade agreements, not to mention the after-effects of Sept. 11, 2001. Now manufacturers are facing the prospect of significantly higher natural gas prices this coming winter that could put another huge dent in profitability.
“Everyone from Alan Greenspan down to local experts are very concerned, and rightly so, about the price of natural gas,” said Nielsen Cochran, Central District Public Service Commissioner. “The cost of natural gas is going to be extremely volatile. I think that is a known.”
Normally natural gas prices are highest in the winter when gas is in demand for heating. The gas prices usually creep up during the mid to late fall, peak in the winter, and start falling in the spring and summer. Cochran said previously natural gas would come down to about $1.50-$2 per thousand cubic feet (Mcf) of gas in the summer, at which time gas supply companies could purchase the gas to replenish storage capacities and prepare for the winter ahead. Often industries would hedge prices by purchasing gas ahead.
But this past winter natural gas went to record highs of $10 per Mcf compared to the average of about half that amount.
“And what has happened is the price has not dropped,” Cochran said. “In recent days it has been hovering about $5 to $6. If you have a normal or extremely cold winter this winter, you are going to see record-breaking heating bills. That is going to happen simply because we have not seen any $2 per thousand cubic feet of gas this summer.”
There have been many state and national news stories of late about fears that the high cost of natural gas could be very harmful to the nation’s economic recovery because of the financial burden this will place on industrial users and large commercial users. Residential users will also be impacted. The Energy Information Administration (EIA) estimates that, assuming normal winter weather, residential customers will pay about 70% more for their natural gas bills this winter than last winter.
The high cost of natural gas has already had a big impact on some industries. For example, Mississippi Chemical’s bankruptcy was directly related to high cost of natural gas used to make their products. Two years ago when the price of gas went so high, some industrial users saw it was more profitable to shut down their industrial equipment and sell the capacity they had purchased to other users.
“That is unheard of,” Cochran said.
Roland Woodard, chairman of the Mississippi Manufacturers Association (MMA) energy committee and senior refining engineer, Ergon Inc., said current trends would indicate natural gas prices not improving significantly by winter. However, he says there may be some relief in gas prices before the winter if there aren’t any interruptions in supply or transportation, which can be affected in part by hurricanes. But there are also indications of a slight decline in natural gas imported from Canada next winter because of declining production rates there coupled with more domestic demand.
A lot will depend on how cold it is next winter. Woodard said an average or colder-than-average winter would keep prices at or above what was seen this past winter.
“There is a lot of concern,” Woodard said. “There has already been enough market destruction, as we term it in the gas industry.”
Switching to alternatives fuels such as No. 2 and No. 6 fuel oil could be helpful for some industries. Woodard said if more industries switched, it would reduce the demand for natural gas.
“However, in talking with other people in the gas industry, those people who could afford to switch to other fuels have already done so,” Woodard said. “To be honest, it is going to be a challenging winter for manufacturers who are highly dependent on natural gas.”
Kevin Akers, president of Mississippi Valley Gas, says not just industrial but commercial and residential customers could be in for a tough winter. “I think we are all concerned about the high prices that we’re facing this winter,” Akers said. “Mississippi Valley Gas along with our parent Atmos Energy has tried to take a proactive stand in addressing the high gas prices. We hedge our gas supplies up to 25 percent of our winter needs, and we started a communication campaign this month in conjunction with the Public Service Commission trying to get the word out to all customers what the gas price situation could be this winter.”
Mississippi Valley Gas has inserted information on energy conservation tips in this month’s bill, and plans an advertising campaign as well.
“Insulation, weather stripping and programmable thermostats are always a help that allow you to control the temperature of the home more accurately,” Akers said. “Being aware of the cost and how you use energy is a good defense. What we are trying to communicate early and often is that high gas prices are not a benefit to Mississippi Valley Gas. High prices actually hurt our company because people go into conservation mode, we get increased calls from customers upset about prices, and it increases our past due accounts as well.”
Mark Leggett, director of government affairs for the MMA, said there is still some hope prices will decline, which would be helpful to manufacturers who are increasingly hedging their gas purchases. He said before it was common for manufacturers to hedge three months out, but now they may be hedging as much as 12 months out.
Manufacturers can get a double whammy when they also have to pay more for electricity generated from natural gas.
“As natural gas has become a bigger and bigger factor in electricity generation, you see that price later reflected in a fuel cost adjustment on your electric bill,” Leggett said. “So you kind of get it twice if you use natural gas and electricity.”
Kurt Brautigam, manager of external communications for Mississippi Power, said their customers should not be affected by rising natural gas prices anytime through the end of this year.
“Of course, anytime you see increases in prices from one part of the energy sector there is the capacity to increase costs through other sectors,” Brautigam said. “We have several different options with our fuel sources. In fact, we are now about 50-50 using either natural gas or coal, which we think is a good balance and provides us the option of selecting whatever is the most economical as well as available source to run our generation.
“Over the past couple of years we have tried to do more hedging — purchasing forward of our natural gas. That is what should allow us to have stable pricing for our fuel through this year. At this point we are also trying to buy forward for next year, trying to find the best price we can. Many times the price stability, not just cost, is important so you don’t get swings up and down and numerous adjustments throughout the year. That is one thing we do to assure good value and stable pricing through the fuel part of our operation.”
Contact MBJ contributing writer Becky Gillette at email@example.com.