US Natural Gas: Higher demand causes concern. Inadequate levels of supplies to meet
the expected growing demand during the next few years is worrying industry chiefs
Financial Times, September 29
by Hillary Durgin in Houston
Common sense would appear to dictate that the bullish forecasts for the US natural gas industry would have most industry executives sitting fat and happy.
On the contrary. Projections that the US demand for natural gas will balloon by about 36 per cent to 30 trillion cubic feet in the next 10 to 15 years is a source of serious concern. The industry's chief worry is whether there will be adequate supplies to meet demand.
"We are going to have some problems," says Bobby Shackouls, president and chief executive officer of Burlington Resources, a Houston-based independent oil and gas producer and one of the largest producers of natural gas in North America.
Like many people in the industry, Mr Shackouls is concerned that inadequate levels of gas supplies to meet growing demand during the next few years could create a situation where the industry's reliability is called into question. "It's setting itself up for government intervention," he says.
Right now, due to a number of factors, winter supplies of US natural gas are at the tightest levels they have been since the 1970s. The wholesale price of natural gas has doubled in the past year and industry analysts say the current Dollars 5 price could rise to between Dollars 6 to Dollars 10 per thousand cubic feet or more on winter days when demand is strong. The US Department of Energy expects that this winter will be the most expensive for natural gas users compared to the last 15 years.
"You're going to see a lot more strain in the market," says Gerald Keenan, who heads PricewaterhouseCoopers' energy and utilities practice in North America. "We have lulled ourselves into a notion that gas will always be cheap, gas will always be available and any dislocation will be modest."
While Mr Keenan does not think the current Dollars 5 price of natural gas is sustainable, he says he thought gas would remain in the range of between Dollars 3 to Dollars 3.50 during the next two years.
Analysts expect supplies to begin to increase next year as additional gas supplies come on from the deep waters of the Gulf of Mexico, the Rocky Mountains and Canada, although the current tightness in the market could continue during the next two to three years.
Meanwhile, imports of liquefied natural gas are up significantly. Two terminals that had been mothballed - in Cove Point, Maryland and Elba Island, Georgia - are in the process of being reopened to handle additional gas demands. In addition, natural gas development projects and accompanying pipelines to transport gas from Alaska and the Mackenzie Delta in Canada are beginning to look economic.
"Between 2005 and 2010, in our view, it's almost likely that you will see one of these pipelines getting built," says Ed Kelly, director of research, North American natural gas for Cambridge Energy Research Associates in Houston. Still, the successful development of new natural gas reserves represents a big challenge for the industry.
"If we truly think of a 30 trillion cubic feet market in continental US between 2010 and 2015, we're going to need some new supply basins," says Fred Fowler, group president of energy transmission at Duke Energy, a North Carolina-based energy company. "If you're not viewed as a secure supplier, people will look at alternatives."
There are several reasons for this past year's sharp increase in natural gas prices. During the last three years, moderate temperatures have eclipsed the growing demand for natural gas. Nine years of uninterrupted economic growth have spurred demand for natural gas and its clean-burning qualities have made it the fuel of choice for virtually all new power generation being built in the US today.
During this period of growing demand, however, the industry weathered tough conditions. Historically low energy prices just 18 months ago prompted oil and gas companies to cut capital budgets and slow drilling considerably.
At the same time, US production has been declining. And because of warm winters that have shortened the Canadian drilling season, Canadian production has been flat.
The result is a soaring natural gas price and an industry in a tailspin over how to accommodate demand. Prices on the spot market are expected to average about Dollars 3.60 per thousand cubic feet for the year, up about 50 per cent, according to investment bank PaineWebber in New York. That is beginning to make a serious impression on industries and consumers.
The North American fertiliser industry, for which the price of natural gas constitutes roughly 80 per cent of its manufacturing costs, has shut down an estimated 20 per cent of ammonia production (which is a principal feedstock for fertiliser) and laid off workers to cut costs.
The fertiliser and other natural gas intensive industries, however, are not alone in feeling the impact of high prices. Energy-intensive industrial customers, such as Kimberly Clark and International Paper, have switched to coal for a portion of their power supplies.
Meanwhile, companies are doing all they can to meet demand. Burlington Resources, for example, which has acquired two significant oil and gas producers in the US and Canada in the last few years, is focusing part of its efforts on developing big gas plays in areas including the Mackenzie Delta.
Duke, which, through its pipelines, is the largest transporter of gas to the north-east, and a leading supplier to the mid-Atlantic region, plans to spend about Dollars 250m annually in the next five years to expand its systems. And CMS Energy, which owns the largest operating open access LNG import terminal in North America, has increased the number of cargoes it has committed to receive this year to 41, totalling about 110bn cubic feet of LNG. |
