To all: Good article on gaseous things to come. Aggie
INDUSTRY FEATURE: Climbing a Gas Mountain
Study sets out steep challenge that faces US to meet rocketing demand
By Robert Smith
NEW ORLEANS, Mar 31 - Apr 6 (Upstream) - The great and good of the US energy industry are wrestling with the implications of an in-depth study into future growth in demand for natural gas and how to meet it.
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The year-long study was completed by the National Petroleum Council (NPC) and is awaiting distribution in its final form.
The NPC, a public-private advisory body to the US Secretary of Energy, conducted a benchmark study in 1992 on the potential for gas through the year 2020 and beyond.
In 1998, then Energy Secretary Federico Pena asked the NPC to revisit the subject, noting that some significant changes in the industry would "profoundly affect energy choices in the future". He cited the restructuring of the electric utility market and the growing concern about the consequences of using high carbon-content fuels on global climate and regional air quality.
Pena's successor Bill Richardson endorsed the request for a new study that NPC conducted under the chairmanship of Peter Bijur, chairman and chief executive of Texaco. A summary was approved last December and the final report in three volumes is due for release shortly.
One key difference immediately apparent when comparing 1992 and 1998 is that the US economy has been growing far more rapidly than anticipated eight years ago and with it demand for gas. The study now estimates demand will grow by 32% between 1998 and 2010, from 22 trillion cubic feet to 29 Tcf.
Of the 7-Tcf increase, almost half will come from the electricity generation sector. Industrial use will account for 23% of the increase, residential applications 19% and commercial users 11%. Demand growth through 2015 could reach 31 Tcf.
The impact of Kyoto-related environmental regulations were not factored into the study. Independent surveys by the Energy Information Administration and the Edison Electric Institute respectively put such impact on gas demand at between 2% and 12% and between 10% and 22%.
Natural gas currently provides 24.1% of total US energy consumption, according to the 1998 figures.
A key finding is that a sufficient US resource base exists to meet expected growth. However, it raises a number of issues critical to realisation of the upstream supply forecasts.
Among these are access to resources and rights of way, technological advancements, financial requirements, expansion of the US drilling fleet and availability of skilled workers.
The US resource base of natural gas currently stands at 1466 Tcf, a 23% increase since the 1992 study excluding 124 Tcf of production. The increase is largely attributable to advancing technology opening new frontiers such as the deep-water Gulf of Mexico and providing better tools for enhanced recovery of resources.
The technologies that have expanded the resource base, however, also illustrate that production is more problematic with the bulk of new output coming from deeper wells, deeper water and more non-conventional formations.
For example, deep-water production (depths greater than 200 metres), accounting for 0.8 Tcf annually in 1998, will increase to more than 4.5 Tcf in 2010. Onshore production from non-conventional formations will increase by 50% by 2010.
Overall, Gulf deep water and Rocky Mountain production will increase while Gulf shelf and coastal production will decline.
The study points out that much of the US resource base resides on federal land and is not open either to assessment or development, including the two most promising regions for future gas production, the eastern Gulf and the Rocky Mountains. More that 200 Tcf of Lower-48 states' resources are subject to access restrictions - 137 Tcf in the Rockies, and 76 Tcf in offshore Atlantic, Pacific and eastern Gulf areas.
The study concludes that access to some portion of the federal gas resource base currently closed or significantly restricted is essential to meeting projected demand with cost-competitive supplies.
Continued technological advances are also crucial to improving operational efficiencies, reducing resource development time, increasing production, controlling costs and minimising environmental impact. The study assumes such advances will continue but notes that industry restructuring, consolidation and spending cuts have resulted in reductions of research budgets.
About $1.5 trillion at 1998 prices will be required to fund the industry through 2015, including $700 billion for operating expenses and $785 billion for capital investments. The lion's share, $685 billion, of capital expenditures is projected to be spent on oil and gas supply (upstream) development.
In addition to cash flow, outside investment capital is essential to continued industry growth. To attract this level of capital investment, the industry must be able to compete with other investment opportunities, particularly in E&P, which has historically delivered returns lower than the average S&P 500.
In order to meet projected gas demand growth, the total number of oil and gas wells drilled per year (including dry holes) will have to double from about 24,000 in 1998 to more than 48,000 by 2015. Reaching this level of drilling will require an increase of 80% over the 1250 average active rig count of 1999.
Boom and bust cycles have been particularly hard on oilfield service and supply companies, not least the drilling contractors. Onshore, a historical attrition rate of 5% of rigs per year continues. At that rate, most of the existing 1700 onshore rigs will be retired and nearly 1900 new ones will have to be built by 2015.
While fewer new offshore rigs will be called for, their cost is significantly greater per unit than for onshore rigs. New offshore rig requirements to meet the accelerated drilling schedule through 2015 are estimated to include 10 deep-water rigs, 32 platform rigs and 30 jack-ups and barges.
The study also notes that availability of skilled workers is a significant industry concern. The elimination of more than 500,000 jobs since the 1980s, more that 40,000 in 1999 alone, combined with a reduction in industry hiring rates over the past 20 years have left an average of 40% of the workforce reaching retirement age in the coming decade.
Equally troubling, enrollment in some energy-related college curricular has been decreasing significantly since the mid-1980s.
An estimated 61,000 kilometres of new transmission pipeline, representing approximately 30 Bcf of incremental inter-regional pipeline capacity, will be required to meet 2015 demand. That is about 3500 kilometres per year or about what the transmission sector has been installing. About 360,000 kilometres of distribution mains, or about 24,000 kilometres per year, will be called for, slightly more than the industry has been installing.
Investment capital required by the transmission and distribution sectors is about $123 billion, 70% for distribution facilities, 25% for transmission and 5% for storage.
Pipeline companies also face access issues involving rights-of-way on both public and private land and environment-related obstacles, which can delay getting facilities in place on a timely basis to meet market demand. |
