U.S. natural gas supply and demand levels have been too close for comfort over the past two years and are expected to become even more constrained in the future without fresh new gas supplies from Alaska, liquefied natural gas (LNG) sources and frontier gas-rich drilling regions, according to a new report released by the American Gas Association (AGA) Wednesday. But achieving these feats will require radical changes in public policies, namely the lifting of drilling restrictions in Alaska’s Arctic region, the Lower-48 states’ western basins and the gas-prone offshore areas, it said.

The “balance between supply and demand has been extremely tight since [2000], creating a ‘tightrope’ effect in which even small changes in weather, economic activity or world energy trends have resulted in wholesale natural gas price fluctuations,” said the AGA report, titled “From the Ground Up: America’s Natural Gas Supply Challenge.”

“The industry no longer has the ability to simply produce more in periods when demand jumps. This is why spikes in demand since 2000 have pushed prices sharply upward. This tight supply/demand balance is likely to be with us for several years,” it warned. Tightening supplies, along with forecasts of a cold winter ahead, sent the near-month futures contract price for gas to a 19-month high last week, eclipsing the $5 mark for deliveries to Henry Hub in January.

Traditional domestic gas sources contributed 19.3 Tcf in 2001, which was about 12% less (2.7 Tcf) than the national demand of 22 Tcf that year, according to the AGA report. If current drilling restrictions persist, that gap is likely to widen significantly over the next 20 years, with traditional gas sources contributing only 19.7-24.7 Tcf, or approximately 25-40% less (8.3-13.3 Tcf) than the anticipated demand of 33 Tcf by then, it said.

It sees Canadian gas imports potentially making up the lion’s share of the U.S. shortfall, with imports likely to nearly double from 3.6 Tcf in 2001 to 4.5-7 Tcf by 2020. However, the report said the U.S. will have to look to non-traditional gas sources as well — Alaskan gas, LNG imports, coal-bed methane gas production, and exploration and production in frontier onshore and offshore regions.

If producers are allowed greater land access and technological advances accelerate, it said the traditional gas recoverable resource base could expand by another 300 to 600 Tcf in the U.S. over the next 20 years, and by 100 to 300 Tcf in Canada. Under this scenario, “growth from the current 22 Tcf consumption [in the U.S.] to an annual market of 30 Tcf or more would not place significant sustained upward pressure on gas prices.” But if production “is limited to only areas that are currently producing gas, growth in the resource base will slow or decline,” AGA warned.

Without “prudent removal” of some of the restrictions on producer access to lands in the U.S., “producers will likely not be able to continue to provide increased amounts of natural gas from the Lower-48 states to customers for longer than 10 or 15 years,” the AGA said. “The time is now to make relatively unexplored regions of the Lower-48 available for exploratory work to determine their natural gas potential,” it urged.

Given the long lead time associated with producing and transporting gas, “critical decisions must be made now” by industry and policymakers, said AGA President David N. Parker in a statement.

“Today, roughly 99% of the U.S. gas supply comes from traditional land-based and offshore supply areas in the U.S. and Canada. During the next two decades, non-traditional supply sources such as Alaska gas and LNG will likely account for a significantly larger share of the supply mix.” In the 1980s and 1990s, these non-traditional sources of gas were not considered competitive when U.S. gas was priced at about $2/Mcf, the report noted. “However, most analysts suggest that these sources are competitive when gas is in a $3 to $4 price environment,” as exists now.

Since 1995, wellhead gas production in Alaska has averaged 9.4 Bcf/d, which is “exceeded only by Louisiana and Texas,” but 86% of the production has been re-injected in order to improve oil recovery, AGA noted. The Potential Gas Committee estimates Alaska’s total natural gas resource base to be 250 Tcf — “enough to support all of the United States’ current natural gas needs by itself for more than a decade.”

But the chances of Alaska gas becoming a major supply source hinges on either the construction of a long-line pipeline to deliver North Slope gas to the Lower 48 market, or a plant in Alaska to liquefy gas and transport it to the U.S. West Coast.

The AGA report sees LNG accounting for as much as 2.2-3 Tcf of U.S. supplies by 2010 and 4.7-7 Tcf by 2020. “The expansion of existing LNG facilities and construction of new facilities in the U.S. offer a significant mid-term option for increasing gas supplies.” It noted U.S. LNG terminals could receive more than 800 Bcf annually from foreign sources, if fully operational.

“With the opening of new terminals in Mexico after 2005, Mexican demand for U.S. gas supply may trail off,” leaving the supply for the expanding domestic market, the report said. “Therefore, the recent surge in net U.S. gas exports to Mexico should last through much of the decade, but after 2010, net U.S. gas exports are likely to end.”

In addition to Alaska gas and LNG, the AGA identified a number of “relatively unexplored” regions that it believes must be opened to producers to supply growing domestic demand. “Although the Lower-48 and Western Canada have been heavily explored, large regions such as the Atlantic offshore, the Mackenzie Delta-Beaufort Seas and Eastern Gulf of Mexico are still considered frontier” areas that are believed to be rich in gas deposits, the report said.

“Rocky Mountain basins, South Texas, North Texas/Louisiana, and the smaller producing areas (in aggregate) scattered across the Lower-48 from California to the Appalachian Basin are good prospects for increased production,” it noted. “Significant increases in production from deepwater in the Gulf of Mexico will be needed to offset declining production in Gulf waters closer to the coast.”

Canadian gas production has room to grow in the future as well, “but that growth is likely to rely mostly on production outside Western Canada and on successful development of coal-bed methane reserves within Western Canada,” the report noted. The U.S., which has banned drilling off of its East Coast, could take “lessons” from Canada, which has managed to drill “safely and reliably” off of Sable Island and in eastern Canadian waters, it said.

The report, which can be viewed on AGA’s web site at https://www.aga.org, is based on research conducted by the American Gas Foundation for the Department of Energy.

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