$11 billion in 9 days—Texas’ natural gas sellers cashed in on deep freeze

While Texans froze and natural gas-fired power plants tripped offline during a February cold snap, natural gas traders and pipeline companies made up to $11 billion in just nine days. The handsome profits came thanks in part to a system that left utilities and customers dependent on the state’s lightly regulated natural gas market, which some are comparing to a black box.

Texas’ grid collapsed in the early morning hours of February 15. The incident was caused largely by coal, natural gas, and nuclear power plants that failed due to equipment that was not prepared for the frigid temperatures. Equipment problems at gas power plants were compounded by a lack of supplies. In the days leading up to the blackouts, the chair of the Public Utility Commission of Texas spoke with the governor's office 32 times about natural gas curtailments caused by a shortage of supplies. 

Early gas shortages may have been more severe than previously known, according to a new report by BloombergNEF. In the six days before the outages began, daily Texas gas production dropped by nearly 6 billion cubic feet, almost a quarter of the state’s total. That was due in part to producers shutting down wells in advance of the cold weather. Producers' equipment may not have been winterized, either, and fracking requires massive amounts of water, which can freeze pipes and wells. After the blackouts began, gas production dropped another 5 billion cubic feet over the next several days as wells still operating lost power. By the end of the blackouts, almost half of the state’s natural gas production was offline.

Gas providers canceled their contracts with utilities and power producers, which had to turn to the volatile spot market to make up the shortfall. As gas supplies tightened, traders and pipeline companies could charge “almost any price they wanted,” power executives told Bloomberg.

Major players

Two major players in the Texas gas pipeline system reaped substantial windfalls from the disaster. Energy Transfer Partners reported record earnings for the first quarter, securing a profit of $3.29 billion compared with an $855 million loss for the same quarter in 2020. Kinder Morgan, another large gas seller in Texas, made $1.41 billion in the first quarter this year compared with a loss of $306 million in the first quarter of 2020. We’ve reached out to both companies for comment and will update this story if we hear back.

One utility, CPS Energy, is blaming Energy Transfer for its woes. The company’s CEO, Paula Gold Williams, has said the pipeline company engaged in “blatant unlawful price gouging” and used the cold snap to “generate more than two years’ worth of profits from intrastate gas sales in just the first quarter of 2021.” CPS is suing Energy Transfer to recoup a portion of the $1 billion it lost during the storm. In a statement to Bloomberg, Energy Transfer co-CEO Tom Long blamed the utility’s “miscalculations of the severity of the storm and their lack of competent planning.”

If spot prices hadn’t spiked, gas suppliers would have shared in the pain when producers began shutting down wells. But the spot market’s high prices more than made up for the issues. “If you’re producing half as much gas as normal but selling at 70 to 100 times the price, then that math is working for you,” one anonymous executive told Bloomberg. “You just had the greatest week in the history of the gas market.”

Furthermore, Texas’ lightly regulated gas industry doesn’t require public price disclosures, which meant that buyers like power companies and utilities didn’t know whether the deals they were getting were reasonable.

Before the cold snap, natural gas in Texas had been trading at around $3 per million BTUs. During the cold snap, one executive discovered a major hub selling gas at $50 per million BTUs, already nearly 17 times the normal price. By the time the gas made its way through Texas’ pipeline system and companies marked the product up, it sold for up to $300 per million BTUs, a whopping 100-fold premium over typical prices.

Ratepayers across the country, and in Texas in particular, will be paying for the surge in natural gas prices for years. Texas' legislature has proposed a multi-billion-dollar bailout for utilities that paid exorbitant prices for natural gas and generating capacity. In other states like Minnesota, where spot market prices also surged, customers are on the hook for hundreds of millions of dollars since utilities can pass on the additional costs.

Much of the misery caused by the blackouts could have been avoided if gas producers and power plants had winterized their equipment. “At least a quarter of the blackouts could have been averted if the fuel supply had held up,” Daniel Cohan, associate professor of environmental engineering at Rice University in Houston, told Bloomberg. “If we only winterize gas power plants without winterizing gas supply, my fear is we’re going to have inadequate fuel supply in the future.”