Answering the Natural Gas Question
Oil & Gas Investor: America's Independent, July/August 2004 issue
By Nick Snow
In a few more months, politicians and the public almost certainly will ask why more natural gas is not being produced in response to continued high prices. Independent producers are working already to develop solutions instead of excuses.
Energy became a 2004 election issue when the average U.S. retail price for a gallon of unleaded regular gasoline broke the $2 barrier late this spring. The political and public outcry softened somewhat in mid-June as gasoline prices began to come back down.
Natural gas prices, meanwhile, have stayed around $6 per thousand cubic feet (McO at the Henry Hub. In its July short-term energy outlook, the U.S. Energy Information Administration (EIA) said that it expects U.S. Henry Hub gas prices to average about $6.30/Mcf in 2004, approximately 9 percent more than 2003's average. "Even though inventories of natural gas appear normal, strong demand for natural gas, coupled with high petroleum prices, has lifted natural gas prices," EIA said. It expects domestic natural gas demand to rise by about 1.1 percent this year "due to increasing economic growth, the continuing rise in electricity demand, and below-average hydroelectric power levels in the Pacific Northwest." EIA forecast flat natural gas demand growth in 2005 as end-use prices remain high.
It seems inevitable that as the winter heating season's approach begins to make demand grow in a few more months, public and political attention will shift to natural gas, and the basic question will be: "Natural gas prices have stayed higher than normal for some time now. Why aren't producers drilling more wells and producing more gas?"
The answer to the questions first part is simple: Producers are drilling more wells. U.S. gas well completions climbed 24 percent year-to-year to 6,254 wells during the second quarter, the American Petroleum Institute (API) said in its latest quarterly completion report. oil well completions fell 6 percent to 2,184 during the threemonth period, and dry holes - many of which were drilled in pursuit of gas - rose 9 percent to 1,098, API said. States also are issuing more drilling permits. In Texas alone, the number issued by the Railroad Commission in the second quarter totaled 4,171, 8.7 percent more than the 3,836 issued during the same threemonth period in 2003. The totals include oil wells and dry holes, but a substantial portion was for gas wells.
The problem, say regulators as well as producers, is that individual wells do not produce as much natural gas as their predecessors. "Despite rising new natural gas well completions, which totaled an estimated 20,000 in 2003 and are expected to remain high at over 23,000 wells per year through 2005, the apparently high rates of production decline from existing wells mean that these high drilling rates are expected to only modestly improve existing levels of U.S. production," EIA said in its July shortterm energy outlook.
Producers say there are other problems in getting gas to consumers. "The market for natural gas is as good right now as it has been at any time I can remember since 1 came into the industry in 1976. Yet that market is not enough to ensure that gas we produce gets to market," Joseph C. Abel, president of the Texas Independent Producers and Royalty Owners (TIPRO), testified during the Texas Railroad Commission's annual State of the Industry conference in late January "There would be more wildcat exploration and more developmental drilling if we were able to get our gas to market equitably The amount of fees and penalties and connection charges imposed by pipelines are hard to justify to most producers, large or small. We need transparency and fairness for our market to truly be free. The abuse of monopoly power by pipelines is the greatest threat to health of the natural gas market in Texas."
"We think it's easy to see that, when large pipeline entities fail to receive approval to raise rates for peripheral services at the city gate, they simply gel the same amount of revenue they desire by going to the other end of the pipe where we are," added T.D. "Rusty" Howell, TIPROs immediate past president, at the same hearing. "Gas contracts proposed to us by gas purchasers continue to contain provisions whereby we agree to bear this burden unfairly or risk being severed from the sales line. We turned one down recently that contained a prohibition against suing the buyer of the gas for breach of contract. The same old 'lake it or leave it' attitude from many gas purchasers I have witnessed repeatedly in my career continues with a vengeance. Arbitrary imbalance penalties, excessive surcharges, facility use fees and metering fees are some of the areas that need close scrutiny and correction by regulatory authorities."
"Producers in the West are seeing that the country recognizes natural gas is an ideal fuel that is environmentally recognizable. At the same time, some policymakers fail to recognize that supplies have to be increased to meet growing demand," said Brian Jeffries, co-chairman of the natural gas committee at the Independent Petroleum Association of Mountain States (IPAMS). "If producers slopped drilling wells today, the United States would have 25 percent less natural gas available. It's great to have strong nalural gas reserves, but if you don't make it deliverable by drilling wells, it's money in the bank that you can't get to."
IPAMS members notice that an increasing percentage of western gas resources are under federal lands, which can make them difficult to reach, he told America's Independent. "I think much of the country doesn't realize that by restricting access to the resource, it is hurting itself," he maintained. "The practical consequences of higher prices mean that people can lose their jobs. There are approximately 1 million people employed in chemicals, plastics and other industries that are in danger of getting laid off as jobs go overseas because of high gas prices."
Drilling on federal lands in the Rocky Mountains often involves working with more than one federal agency. Jeffries said that while the Bush administration has done a lot to improve coordination, "there's always more to be done." For example, it takes significantly longer to get a federal drilling permit. "The State of Wyoming can turn a drilling permit around in 30 to 45 days," said Jeffries. The federal government is working torward the same target, but it has had to work down a backlog of delayed permits applications. Leases also sit idle as business conditions change, making development more difficult. "Certain areas may have a limited drilling window owing to weather and wildlife conditions," Jeffries explained. "These kinds of uncertainties lead into other issues, such as transmission. If someone wants to construct a pipeline, he needs commitments from producers to pay for it. Producers are understandably hesitant to make such commitments if they're not certain they'll be able to drill.
"Even after you get your permits, you still face potential delays from litigation," he continued. "In the Powder River Basin, after three years of preparation and $2 million of expenditures, the day after the record of decision came out, litigation was filed." Market access has improved, Jefleries said, with a new pipeline going west, and another under construction that will ship Rocky Mountain gas east. "More will be needed. But pipeline companies don't build on speculation. They only build wilh creditworthy people, and people only become creditworthy when they become certain they'll have products," the IPAMS official said.
The situation is equally challenging in California, where there are more than 4 Tcf of onshore gas reserves and an estimated 23 Tcf of gas reserves off its coast. In-state production, meanwhile, satisfies only 15 percent of the state's natural gas needs, down from as much as 25 percent historically according to Rock Zierman, president of the California Natural Gas Producers Assn. and public affairs director at the California Independent Producers Assn. (CIPA).
When the California Energy Commission and Division of oil, Gas and Geothermal Resources held a workshop on enhancing gas production in the state in May 2003, CNGPA outlined all of the impediments. "Since that time, the energy commission and DOGGR have begun a series of follow-up workshops on each item raised," said Zierman. "We had a workshop on permit streamlining at which we created the Northern California Natural Gas Permit Streamlining Work Group. It is made up of federal, state, and local agencies that permit gas projects as well as industiy representatives."
At the work groups meetings, Zierman continued, participants have tackled both specific permit problems individual producers are having as well as the overall process. "We have begun developing producer handbooks that lay out everything a producer needs (permit wise) at the beginning of the process," he told America's Independent. "It is hoped that this handbook will provide a map to both producers and planners and cut the approval process in half. Some counties like Contra Costa, have even appointed a specific planner to work on natural gas projects so that a level of expertise is created."
The associations also have been able to get legislation introduced to expedite the oil and gas exploration and production permitting process. A bill sponsored by California Assembly member Joe Canciamilla (D-Pittsburg) designed to do that passed out of committee, but did not meet the deadline for bills to reach the Assembly Floor. Canciamilla added the bill as an amendment to another measure, which passed out of the Senate Local Government Committee. ClPA and CNGPA hope that it will be passed and signed by Gov. Schwarzenegger. "Although only a modest step, it will give cities and counties the ability to create a expedited process for reviewing natural gas permits, paid for by industry," Zierman said.
California producers also face an unusual challenge because one of the state's biggest utilities, Pacific Gas and Electric, owned many of the gas gathering systems in the state. "We have made progress on establishing a standard purchase and sales agreement with PG&rE for the sale of their gas gathering pipelines," said Zierman. "CNGPA signed off on the proposal and it is being reviewed by PG&rE management. We hope to roll it out to the producer community sometime this year and begin the process of selling the lines."
IPAMS, meanwhile, has shifted its emphasis in the last year to community education, starting locally and expanding across the country. "It all fits together. You can't separate it," maintained Kathleen Eccleston, the associations public relations director. "The opposition to this part of our economy is putting out information that is not necessarily accurate. IPAMS is working hard to get accurate information to the public. We're also trying to work with policymakers so they'll see the links." Once people recognize the facts, they need to comment, she continued. "I'm not sure that the general public realizes the kinds of opportunities it has in submitting letters to the editor or writing their representatives. They can get involved and do some positive things," Eccleston said.
The association and its members realize that they face a particularly large challenge in doing this. "It seems as if every time someone wants to develop a natural gas project, there's opposition centered around 'anyplace but here,'" said Jeffries.
"So it's logical to ask, 'If not here, where? If nowhere, what about higher natural gas costs and lost jobs?' It's wrong not to give teachers pay raises because the school systems need to pay energy bills." When enough people outside the industry raise such points in response to the basic natural gas question, the answer quickly becomes more obvious. |
