Coastal CEO: Gas Is The Future
Think anything but gas is the way to go for the energy
industry's future? Forget about it. Gas is where it's at and where
it will continue to be for some time, Coastal CEO David Arledge
told a room full of producers in Houston at the Texas Independent
Producers & Royalty Owners Association's (TIPRO) luncheon last
Arledge was talking tall following the release of 1998 earnings
that set a new record for the company (see NGI Feb 1, 1999). Why is
gas so great? Arledge spelled out his reasons, chief among them is
expected demand from the power generation sector. "You can build a
modern, gas-fired, combined-cycle plant for one-half the cost in
one-third the time on less than one-fifth the land with 40% more
efficiency than a coal plant." Also, environmental regulations have
curtailed the ability of generators to switch between gas and oil,
making gas more attractive. There's plenty of gas in the ground,
Arledge said, which leaves producers with the challenge of getting
to it and getting it to market economically.
"Natural gas has regained its place as the preferred energy
source for the future. The Department of Energy, among others,
forecasts that by the year 2010, the demand for natural gas in the
U.S. may grow to about 30 Tcf, an increase of about 2% a year. The
primary driver of this growth is an anticipated 7-8% annual
increase in electric utility consumption of natural gas. Daily U.S.
consumption will rise from 60 Bcf/d to over 80 Bcf, a 33% increase.
To put that in perspective, current production from the entire Gulf
of Mexico is only about 14 Bcf/d. At these rates, in 12 years the
U.S. will have consumed the current combined proved natural gas
reserves of the United States, of Mexico, and Canada.
"I am not suggesting that there is not enough gas available to
satisfy the market. Sufficient developable reserves are available,
and markets have a way of ensuring that demand and supply are
satisfied. It's called price. Prices at or below $2.00 cause
producers to slow or halt drilling activity, reducing supplies.
Prices above $2.00 result in increased exploration drilling and
development activity." The current gas market is weighed down by
little to no winter, and significant storage overhang, Arledge
But the future looks bright, or at least reasonable for gas
prices. Reserve decline rates have increased substantially from
historical averages. "Typical decline rates for Coastal's new wells
in South Texas and in the Gulf are as high now as 50-60% during the
first two to three years of production. [We're] drilling for less
and producing the hell out of what we've got." Add to this the
current depressed drilling activity and the diminished ability of
gas users to switch to fuel oil, and you have a market poised for
rapid recovery later this year, Arledge said. "When this occurs we
believe we will see a resurgence in drilling activity.
"While supplies will not automatically increase to meet
optimistic long-term demand forecasts, a reasonable price range
somewhere between $2 and $3 will create the incentive necessary for
supply to meet demand."
Over the next 10 years, Arledge said he believes gas prices will
be between $2 and $3. If prices average in the $2.25 to $2.50
range, as he thinks they will, Arledge said the industry should be
able to reach close to a 30 Tcf market. "The supply will be
developed and the pipelines constructed to position the gas at the
expanded market. In any event, during this time period the gas
business will be the best business of all areas of the energy
industry in North America."
Joe Fisher, Houston
©Copyright 1999 Intelligence Press, Inc. All rights
reserved. The preceding news report may not be republished or
redistributed in whole or in part without prior written consent of
Intelligence Press, Inc.