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The Gas Century: High Prices, Tight Supply

The Gas Century: High Prices, Tight Supply

The industry almost assuredly will see $4/Mcf gas later this year, and on a cold day in Chicago next winter it may even see gas prices "momentarily spike" to as much as $30 or $40 due to an ever-tightening supply situation, says a University of Houston professor.

"As far as the $4/Mcf gas, we think that it's going to take just a few cold days to show how shallow our current supply of gas is," Michael Economides, co-author of "The Color of Oil, said in an interview with NGI. "We are unassailably moving" in the direction of $4 gas, which he noted was a conservative estimate.

Both Economides and his co-author, Ronald Oligney, have a pretty good track record when it comes to forecasting energy prices. They predicted crude oil would hit $30 a barrel this year when it was languishing at $11.

".....[W]e are really in for a huge increase in [gas] demand over the next 3 to 5 years, and we don't see any mechanism to provide the necessary supply to meet this demand. So the price for gas is going to continue to go up and up and up. We are in for a real [price] struggle with natural gas over the next several years," he warns. When this happens, the worst thing Congress could do is set a price ceiling. This would lead to "dramatic problems," such as a return to the supply shortages of the 1970s.

"There [has been] little thought to supply for what I call the next generation in gas," Economides said, adding that "gas is going to become the new fuel." In fact, while the Department of Energy (DOE) predicts natural gas will account for 29% of the worldwide fuel mix by 2020, he and Oligney forecast it will make up as much as 47.5% of the energy mix by then due to higher demand brought on by electric deregulation and fuel cells. "It's going to be the gas century."

While industry has set its sights on a 30 Tcf demand market by 2010-2015, Economides, whose area of expertise is in production, believes "demand is going to be much larger than that," far outstripping available supply. He envisions a "more logical" growth rate for gas of 1.5 times the conventional forecast to start, rising to 2 times the conventional forecast in 2005 and then climbing to 2.5 times the conventional forecast in 2010. Given these growth projections, "I really would like to see a lot more debate on where we're going to be getting the gas that everybody thinks we're going to have" by then.

Granted, Alliance Pipeline, Northern Border Pipeline and others are building new pipelines or have expanded their systems to bring in gas supply from Canada, but "that is not really new supply," he said. "We would like to see the Alaska pipeline being built" to address demand for natural gas in the long term. He foresees Alaskan gas supplies eventually making it to the Lower 48 market either in the form of LNG or directly via a pipeline that connects to the Canadian system.

While Canada is moving "aggressively" to build up its pipeline infrastructure within its boundaries and across the border, he believes the U.S. is lagging far behind. This lack of a sufficient pipe infrastructure could be the "largest physical hurdle" to meeting the anticipated growth in gas demand.

There are a number of "very telling" factors that suggest greater gas consumption and a corresponding strain on supply, Economides said. "No. 1 is that right now there is a three-year backlog for gas-fired turbines for [power generation] production at General Electric.....This means that natural gas is going to be the fuel of choice for electric power generation." Also, he estimates three times more power generation capacity currently is being built than is required under anticipated demand projections.

Moreover, based on the "not-so-secret multibillion-dollar R&D efforts" of automakers and major energy companies, "we think that fuel cells using natural gas for transportation are coming sooner than people think," Economides noted. Sam Brothwell, a utility analyst for Merrill Lynch, expects fuel cells for automobiles to be available "probably in the latter half of the decade." These factors will combine "to put an enormous pressure on natural gas supply."

The heightened demand for gas in generation is going to create summer and winter peaks, putting further stress on storage, where gas additions already "are the lowest they have been in about 20 years now..We also think that when electric power generation comes on line.....in a year and a half from now, there's going to be a huge competition" between heating and power generation loads for gas supply. "And the electric power guys are going to win all the time in any bidding war." So eventually, Economides believes there will have to be two price schedules for gas - one for power generation and another for heating customers.

What can be done to alleviate a future supply crunch? First, the federal government could provide incentives to promote the construction of "necessary but missing elements" of the U.S. gas distribution system, as well as to "facilitate the permitting process and.....streamline environmental compliance" for new pipeline construction, said Economides and two co-authors in a recent paper on electric restructuring and its impact on gas demand.

Additionally, "small but focused investments in deepwater technology will ensure ready access to natural gas reserves.....A bolstered LNG infrastructure can provide natural gas swing capacity and alleviate supply concerns," he noted. As for the latter, Economides said that while domestic companies are moving to reactivate their LNG facilities, the U.S. largely still remains on the sidelines in global LNG trade.

Susan Parker

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