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Prices, Returns Must Rise to Produce 30 Tcf

Prices, Returns Must Rise to Produce 30 Tcf

The magical 30 Tcf annual natural gas market goal is very much a realistic prospect on the demand side, but much more problematic from a U.S. supply perspective, according representatives of large and small producers addressing a national meeting of state regulators this week.

Despite a general bullishness about natural gas demand and prices, the producers face some significant supply hurdles, including accessible drilling targets and high enough prices to draw sufficient investment capital. They argued for opening up more public lands in North America. One regulator attending the National Association of Regulatory Commissioners' (NARUC) summer meetings in San Francisco questioned the need for releasing more public lands "when all the private land hasn't been explored."

Terry Hudgens, president of Texaco's North American natural gas operations, said the 30 Tcf projection could prove to be "conservative" by 2010. He expects natural gas to become the dominant part of the oil/gas E&P business in North America, expanding to between two/thirds and 80% of operations.

But, it will be expensive. "It takes about $30 billion annually just to stay even because that's the amount we eat up each year," said Hudgens, advising the industry is not producing the financial returns it needs long term to keep pace. He said the top 25 oil and gas producers in the last 12 years only produced an annual average 5.4% return on equity while S&P averages were over 12%. "During that time we've seen our debt ratio go up quite significantly."

The key to the 30 Tcf market is prices, Hudgens continued. He believes there will be very strong demand at prices of $2.50/Mcf, but "considerable" substitution of alternate fuels in electric generation and industrial applications if prices stay at $3/Mcf or more. The distribution and transmission sectors are not helping in that regard. Unless those middleman costs go down, the industry will have a hard time reaching the predicted 30 Tcf market.

Meanwhile, Jerry Jordan, head of Jordan Energy Inc. and president elect of the Independent Petroleum Association (IPAA), predicted prices will go up and stay up. The price increases will "surprise a lot of people." He claimed independents take the heaviest risk in exploring for new, smaller gas fields and therefore need higher prices than those that larger companies will settle for. "The wellhead price is going to go up and as far as the IPAA and the independent producers are concerned that is the only way the independents are going to be able to fulfill their traditional role in this country."

Jordan said IPAA's own surveys of reserves point to "uncharted waters" since the industry has never had to respond to such robust demand with such thin reserves and sparse drilling activity.

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