Prices, Returns Must Rise to Produce 30 Tcf
The magical 30 Tcf annual natural gas market goal is very much a
realistic prospect on the demand side, but much more problematic
from a U.S. supply perspective, according representatives of large
and small producers addressing a national meeting of state
regulators this week.
Despite a general bullishness about natural gas demand and
prices, the producers face some significant supply hurdles,
including accessible drilling targets and high enough prices to
draw sufficient investment capital. They argued for opening up more
public lands in North America. One regulator attending the National
Association of Regulatory Commissioners' (NARUC) summer meetings in
San Francisco questioned the need for releasing more public lands
"when all the private land hasn't been explored."
Terry Hudgens, president of Texaco's North American natural gas
operations, said the 30 Tcf projection could prove to be
"conservative" by 2010. He expects natural gas to become the
dominant part of the oil/gas E&P business in North America,
expanding to between two/thirds and 80% of operations.
But, it will be expensive. "It takes about $30 billion annually
just to stay even because that's the amount we eat up each year,"
said Hudgens, advising the industry is not producing the financial
returns it needs long term to keep pace. He said the top 25 oil and
gas producers in the last 12 years only produced an annual average
5.4% return on equity while S&P averages were over 12%. "During
that time we've seen our debt ratio go up quite significantly."
The key to the 30 Tcf market is prices, Hudgens continued. He
believes there will be very strong demand at prices of $2.50/Mcf,
but "considerable" substitution of alternate fuels in electric
generation and industrial applications if prices stay at $3/Mcf or
more. The distribution and transmission sectors are not helping in
that regard. Unless those middleman costs go down, the industry
will have a hard time reaching the predicted 30 Tcf market.
Meanwhile, Jerry Jordan, head of Jordan Energy Inc. and
president elect of the Independent Petroleum Association (IPAA),
predicted prices will go up and stay up. The price increases will
"surprise a lot of people." He claimed independents take the
heaviest risk in exploring for new, smaller gas fields and
therefore need higher prices than those that larger companies will
settle for. "The wellhead price is going to go up and as far as the
IPAA and the independent producers are concerned that is the only
way the independents are going to be able to fulfill their
traditional role in this country."
Jordan said IPAA's own surveys of reserves point to "uncharted
waters" since the industry has never had to respond to such robust
demand with such thin reserves and sparse drilling activity.
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