El Paso: Production Is Flat Despite Record Rigs, LNG Is the Future

With North American natural gas supply remaining stagnant at about 71 Bcf/d over the last five years, and an estimated 109 Bcf/d of supply expected to be necessary by 2015, El Paso Chairman William A. Wise says the time for liquefied natural gas (LNG) has come.

Even with record numbers of rigs in the ground, El Paso Field Services' pipeline gathering receipts have stayed at 4.4 Bcf/d since January 1998., Wise said at the Howard Weil Energy Conference in New Orleans. With supply stationary at the 71 Bcf/d mark, Wise fears that gas production in the lower 48 is on a tough treadmill, where production levels are barely covering demand. Well decline rates in the Gulf of Mexico as well as Canada are getting higher every year. In 1970, Gulf of Mexico decline rates were at 17% per year, compared to 1996 when decline rates were 49% per year, while in Canada, decline rates were 20% per year in 1990, but doubled to 40% per year by 1998.

Discouraging domestic production results are forcing the industry to turn to imported LNG. Wise said El Paso is in good shape to reap the benefits of the advancing LNG swing, with both its current North American positions and recently revealed future plans. In February, El Paso announced a major LNG initiative for North America (see NGI, Feb. 12), with plans to build six facilities over the next five years at a cost of $1.5 billion. Earlier this month, El Paso signed a letter of intent to purchase LNG from a new Australian production facility to be built by Phillips Petroleum Co. (see NGI, March 12). The deal would provide up to 4.8 million tons of LNG beginning in 2005 for North American markets.

Just last week, El Paso's John Somerhalder II told NGI that LNG costs, including tankers and regasification, are coming down and becoming competitive (see NGI, March 26). El Paso projects that its own earnings before interest and taxes from LNG are expected to top $400 million for the period 2001-2003.

At the conference, Wise also predicted gas prices would stay within the $3-5 range, spurred by electric generation demand. He said he believed volatility would come down in gas and power markets, but it would not disappear altogether. A study done by Cambridge Energy Research Associates showed that gas demand for electric power is expected to increase by 9 Bcf/d by 2005, and 27 Bcf/d by 2015, he noted.

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