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EIA Outlook Shows Tough Challenges Ahead for Producers

EIA Outlook Shows Tough Challenges Ahead for Producers

The Energy Information Administration released its Annual Energy Outlook 1999 (AEO99) last week, projecting gas demand will grow by about 50% to 33.17 Tcf by 2020 from 1997 levels of 22.59 Tcf, which is a 1.7% average annual increase.

Gas demand is projected to rise in all sectors with electric generators leading the charge. The generation sector, excluding industrial cogenerators, will account for 9.2 Tcf of total gas demand in 2020, a nearly three-fold increase from 3.3 Tcf last year. And gas' share of generation demand will increase to 33% by 2020 from only 14% last year. Residential consumption is projected to grow 0.6% annually. Commercial consumption is expected to increase 0.7%/year, and industrial consumption is forecast to rise by 0.7% per year.

EIA said it will be quite a challenge for the industry to meet such huge increases in demand, but it can be accomplished. ".Increases well above those projected in AEO99 have been realized in the past, and the industry's past performance gives reason for confidence that the projected increases can be accommodated," EIA said.

However, the task will not be easy. In order to satisfy the demand projected, aÿnumber of changes will be needed in the U.S. natural gas industry, EIA noted, including a "significant increase in production and considerable expansion of infrastructure."

Natural gas production is projected to increase from 18.9 Tcf in 1997 to 27.4 Tcf in 2020, an average rate of 1.6% a year, to meet most of the rising domestic demand for natural gas. Imports will fill in the remaining requirement. Net imports, primarily from Canada, increase from 2.8 Tcf to 5.0 Tcf between 1997 and 2020.

The Administration projects onshore and offshore gas production will rise 57% and 14%, respectively, while pipeline capacity will increase by 32% over 1997 levels. The industry accomplished a 21% increase in pipeline capacity in seven years, EIA noted, between 1990 and 1997 without demand as the driving force. Shifting supply and demand centers were the primary reasons for the growth during that period.

Much of the pipeline expansion projected in AEO99 before 2001 already is either under construction or planned, and more than half the pipeline expansion expected by 2020 is likely to occur between now and 2000, EIA said.

There are a number of potential problems related to the recovery of natural gas from offshore areas, EIA said, referring to rig and personnel availability, and the expansion of offshore gathering and processing. But EIA is optimistic the industry can handle the job.

Rising demand and prices for gas will "provide additional economic incentives for the investments in infrastructure, rigs, drilling, and manpower development needed to meet the necessary increases in gas production," EIA said. "As a result, it is expected that the natural gas industry will be in a position to meet the challenge of satisfying the demand increases projected."

EIA forecasts domestic wellhead gas prices will rise 0.8% annually to $2.68/Mcf by 2020. Imported gas wellhead prices are expected to increase 1%/year. Prices for gas delivered to industrial and power generation markets are expected to rise by 0.5% and 0.8%/year, respectively. However mainly because of retail unbundling, delivered prices in the residential and commercial sectors actually are projected to fall by 0.7% and 0.4%/year, respectively. Transmission and distribution margins, i.e., the costs associated with those services, also are expected to fall in the residential, commercial and industrial sectors by 1.7%, 1.4% and 0.6%/year, respectively.

In addition to analyzing the impacts of world oil markets, economic growth, technology, and electricity regulations, AOE99 discusses recent and proposed regulatory changes and other current energy issues. The report can be accessed on EIA's Internet site at http://www.eia.doe.gov/oiaf/aeo99/homepage.html.

Rocco Canonica

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