The industry almost assuredly will see $4/Mcf gas later thisyear, and on a cold day in Chicago next winter it may even see gasprices “momentarily spike” to as much as $30 or $40 due to anever-tightening supply situation, says a University of Houstonprofessor.

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

Both Economides and his co-author, Ronald Oligney, have a prettygood track record when it comes to forecasting energy prices. Theypredicted crude oil would hit $30 a barrel this year when it waslanguishing at $11.

“…..[W]e are really in for a huge increase in [gas] demandover the next 3 to 5 years, and we don’t see any mechanism toprovide the necessary supply to meet this demand. So the price forgas is going to continue to go up and up and up. We are in for areal [price] struggle with natural gas over the next severalyears,” he warns. When this happens, the worst thing Congress coulddo 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 thenext generation in gas,” Economides said, adding that “gas is goingto become the new fuel.” In fact, while the Department of Energy(DOE) predicts natural gas will account for 29% of the worldwidefuel mix by 2020, he and Oligney forecast it will make up as muchas 47.5% of the energy mix by then due to higher demand brought onby electric deregulation and fuel cells. “It’s going to be the gascentury.”

While industry has set its sights on a 30 Tcf demand market by2010-2015, Economides, whose area of expertise is in production,believes “demand is going to be much larger than that,” faroutstripping available supply. He envisions a “more logical” growthrate for gas of 1.5 times the conventional forecast to start,rising to 2 times the conventional forecast in 2005 and thenclimbing to 2.5 times the conventional forecast in 2010. Giventhese growth projections, “I really would like to see a lot moredebate on where we’re going to be getting the gas that everybodythinks we’re going to have” by then.

Granted, Alliance Pipeline, Northern Border Pipeline and othersare building new pipelines or have expanded their systems to bringin gas supply from Canada, but “that is not really new supply,” hesaid. “We would like to see the Alaska pipeline being built” toaddress demand for natural gas in the long term. He foreseesAlaskan gas supplies eventually making it to the Lower 48 marketeither in the form of LNG or directly via a pipeline that connectsto the Canadian system.

While Canada is moving “aggressively” to build up its pipelineinfrastructure within its boundaries and across the border, hebelieves the U.S. is lagging far behind. This lack of a sufficientpipe infrastructure could be the “largest physical hurdle” tomeeting the anticipated growth in gas demand.

There are a number of “very telling” factors that suggestgreater gas consumption and a corresponding strain on supply,Economides said. “No. 1 is that right now there is a three-yearbacklog for gas-fired turbines for [power generation] production atGeneral Electric…..This means that natural gas is going to be thefuel of choice for electric power generation.” Also, he estimatesthree times more power generation capacity currently is being builtthan is required under anticipated demand projections.

Moreover, based on the “not-so-secret multibillion-dollarR&D efforts” of automakers and major energy companies, “wethink that fuel cells using natural gas for transportation arecoming sooner than people think,” Economides noted. Sam Brothwell,a utility analyst for Merrill Lynch, expects fuel cells forautomobiles to be available “probably in the latter half of thedecade.” These factors will combine “to put an enormous pressure onnatural gas supply.”

The heightened demand for gas in generation is going to createsummer and winter peaks, putting further stress on storage, wheregas additions already “are the lowest they have been in about 20years now..We also think that when electric power generation comeson line…..in a year and a half from now, there’s going to be ahuge competition” between heating and power generation loads forgas supply. “And the electric power guys are going to win all thetime in any bidding war.” So eventually, Economides believes therewill have to be two price schedules for gas – one for powergeneration and another for heating customers.

What can be done to alleviate a future supply crunch? First, thefederal government could provide incentives to promote theconstruction of “necessary but missing elements” of the U.S. gasdistribution system, as well as to “facilitate the permittingprocess and…..streamline environmental compliance” for newpipeline construction, said Economides and two co-authors in arecent paper on electric restructuring and its impact on gasdemand.

Additionally, “small but focused investments in deepwatertechnology will ensure ready access to natural gas reserves…..Abolstered LNG infrastructure can provide natural gas swing capacityand alleviate supply concerns,” he noted. As for the latter,Economides said that while domestic companies are moving toreactivate their LNG facilities, the U.S. largely still remains onthe sidelines in global LNG trade.

Susan Parker

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