Increased Natural Gas Drilling May Not Avert Price Hikes
March 25, 2003 3:22pm
Mar. 25--Natural-gas drilling is expected to increase over the next two years, but the jump in production will not be enough to meet increasing demand, which could drive prices to record highs, Henry G. "Buddy" Kleemeier told industry leaders Monday.
The executive vice president and chief operating officer of Tulsa's Kaiser-Francis Oil Co. told participants of the Society of Petroleum Engineers' Production and Operations Symposium in Oklahoma City that he expects the industry to experience shortfalls over the next two years.
Demand for natural gas has outpaced production by 4.6 billion cubic feet a day in 2003, forcing the nation to draw its reserves to record lows. But Kleemeier said he expects even larger shortfalls in 2004 and 2005.
"But I don't think there will be a shortage," he said. "I think there will be some users who will choose to use other fuels. I don't think there will be a shortage of gas, but the prices will be higher."
That's a chilling thought considering natural gas, which traditionally averages less than $3 per thousand cubic feet, peaked above $11 this winter and $10 in early 2001.
Production levels have fallen to about 8 percent below the five-year average while the cold winter weather caused demand to jump.
The nation's natural-gas reserves began the season at full capacity of 3.2 trillion cubic feet, and have dropped to a record low of 636 billion cubic feet as of March 14.
With production levels well below the five-year average, reserves are not expected to approach full capacity before next winter.
Drilling has increased only in recent weeks even though prices have been above average since November, and most experts predict that gas prices will not fall below $4 over the next two years. And the current growth is considered moderate at best.
"It's been a quandary for a lot of us to try to explain the situation," symposium chairman Michael L. Wiggins said. "In the past, when we saw strong oil and gas prices, we saw strong activity. But we haven't seen that this time."
Wiggins, associate professor at the University of Oklahoma's Mewbourne School of Petroleum and Geological Engineering, said the slumping stock market wiped out investment dollars and large production companies are waiting to increase drilling until they know prices will meet expectations.
Production companies ramped up drilling in 2000 after the demand for natural gas jumped 4 percent and prices climbed above $10 per thousand cubic feet.
By the time the new rigs were operational, the tech boom busted, the economy slumped, and demand for natural gas plunged 6 percent, driving prices below $2.
Production companies are now hesitant to again ramp up production, fearing a similar collapse, Wiggins said.
Rig counts have gradually improved in the past three months as producers hope to capitalize on high prices, but many production companies -- and the service companies that help them drill -- are still uneasy about the future.
"It keeps us from sleeping at night," said Chuck Henker, a Halliburton Co. sales representative who attended Monday's symposium. "We tried to do everything for our customers to handle the workload, and all of a sudden, the bottom fell out. That hurt a lot of people."
But with demand increasing and production levels well below average, Wade Welkener, a sales manager for Schlumberger Ltd., said the industry is a long way from pumping too much gas into the market.
"Twelve months out on the futures market, gas is still trading at $5," he said. "We would have to get about 2,000 rigs in the air to change that outlook."
Industry experts predict that about 1,000 natural-gas rigs are necessary just to meet current demand. And as the economy improves, natural-gas demand will increase.
But as of March 22, only 776 wells nationwide were looking for natural gas.
"I think you're going to see drilling activity remain fairly constant," Wiggins said. "We'll never see the 4,000 rigs we saw in the boom of the late 1970s, but I think you'll see the drilling count ease up. People are going to start investing in natural gas sooner or later, and that's going to help the rig count."
About 800 industry representatives attended the symposium at the Cox Convention Center. The symposium ends Thursday. |
