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UPDATE:US Utilities Leery Of Natural Gas Despite Output Boom

   (Updates with comment from America's Natural Gas Alliance)

   By Mark Peters
   Of DOW JONES NEWSWIRES

HOLLYWOOD, Fla. -(Dow Jones)- U.S. utilities aren't convinced huge increases in U.S. natural gas output mean it's time to make bigger bets on the fuel.

A boom in natural gas production, primarily from rock formations known as shales, has boosted U.S. reserves and driven a sharp price drop over the last year. Using gas to fuel a power station has the added benefit of emitting only half as much carbon dioxide as burning coal, making it less costly under an expected federal cap-and-trade system for greenhouse gases.

Yet several utility executives said they're staying cautious about ramping up the use of gas to generate electricity. Utilities have been stung before by the fuel's volatile prices, and they remain reluctant to make long-term commitments to gas by building or expanding plants. Companies such as Duke Energy Corp. ( DUK), Xcel Energy Inc. (XEL) and American Electric Power Co. (AEP) see sizable risks to new supplies, including emerging environmental issues, possible global exports and uncertainties over production costs.

"The unanswered question is what is the long-term price of this newly discovered gas," said David Ratcliffe, chairman and chief executive of Southern Co. (SO), in an interview this week.

The hesitation by generators--who make up about 30% of U.S. natural gas demand--comes as the fuel is commanding greater attention from policy makers and consumers amid a big lobbying and advertising push by gas industry groups.

To be sure, more gas-fired units will be built. The North American Electric Reliability Corp. in a report released last week forecasts natural gas generation capacity will increase 38% over the next decade, while coal-fired generation, which currently provides about half of the power in the U.S., will only grow 6%.

The power industry has traditionally relied on gas-fired power to meet demand in peak periods, rather than for so-called baseload generation that runs constantly and is largely provided by coal-fired and nuclear plants. Now, amid the production boom, utilities say they see natural gas as a "bridge fuel," providing a way to transition from traditional coal-fired plants to new nuclear power plants and coal-fired plants that can capture and bury their CO2 emissions.

Among the concerns prompting questions about the long-term viability of gas- fired generation is the environmental impact of shale-gas production. The large quantities of water coupled with chemicals required in the extraction process may limit production, slow government approvals and increase overall costs, utility executives said.

Additionally, executives said the surfeit of gas production could prompt exports of U.S. liquefied natural gas overseas, raising prices and market volatility. Michael Morris, chairman and chief executive of American Electric Power, questioned in an interview this week why gas producers would sell their output in the U.S. if they can get higher prices on the international market.

The utility executives' concerns are stymying talks by gas producers interested in inking long-term contracts with power plants. In some cases, utility executives said gas producers aren't willing to negotiate a discounted price to account for the certainty a long-term contract provides.

"For them to be a real bridge ... they've got to get realistic about doing some more solidified pricing for a five- to 10-year horizon," Morris said in an interview this week.

Rod Lowman, president and chief executive of America's Natural Gas Alliance, said some of its members were working to reach natural gas supply agreements with utilities. ANGA represents the interests of leading independent natural gas producers.

"Everyone is trying to get to a point where these long-term contracts can be signed," Lowman said.

-By Mark Peters, Dow Jones Newswires; 212-416-2457; mark.peters@dowjones.com

(Jason Womack in Houston contributed to this story.)

  (END) Dow Jones Newswires
  11-03-091415ET
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