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
"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
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
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.