AGA Sees Adequate Supply, Lower Demand, Higher Prices

The American Gas Association (AGA) sees nothing but positives in the current gas supply situation despite the fact that inadequate supply in the face of strong demand growth has been behind the recent record increase in prices and expectations of more than $4 gas price averages this year. It's confidence in the long-term growth of demand has been shaken somewhat, however, and its prior price forecasts appear to have been more than a little on the low side.

AGA has very little doubt that domestic and imported supply will be adequate to meet demand this coming winter. Although some experts have concluded that supply could be constrained going forward because of changes in the character of the resource base (see NGI, Feb. 19 and May 14), AGA said in a report released last week that the supply response to the record high gas prices last winter has been significant and will be more than capable of serving demand.

"North America holds abundant supplies of natural gas, record numbers of natural gas rigs are actively drilling, gas well completions are expected to exceed last year's levels and additional supplies of natural gas will be imported from Canada," AGA said in its "Issue Brief on Natural Gas Supply Fundamentals June 2001."

The report highlights trends in various supply indicators (natural gas resources, reserves, non-producing gas reserves, domestic gas production, gas rigs operating, natural gas well completions, working gas in storage, Canadian imports, liquefied natural gas imports, other supplementals and pipeline capacity). It notes that the Potential Gas Committee recently estimated the gas resource base is expected to remain flat this year at 1,091 Tcf but has grown from 1,002 Tcf in 1990 even though 183 Tcf was produced from 1991 to 2000 (see NGI, April 9). Gas reserves are estimated to grow to 170 Tcf from 167.4 Tcf in 1999 and 169.3 Tcf in 1990.

Domestic production is forecast to grow to 19.4 Tcf from 18.9 Tcf in 1999 and 17.2 Tcf in 1990. The number of gas rigs operating reached 913 in March up 53% from one year earlier. Gas well completion are expected to be more than 16,000 this year compared to 15,206 last year and 11,044 in 1990. Gas storage levels are rising sharply and "may well exceed the five year average for working gas in storage by Nov. 1..."

Canadian imports are expected to reach 3.6 Tcf from 3.5 Tcf last year and only 1.4 Tcf in 1990. And liquefied natural gas imports are expected to reach 225 Bcf this year from 220 Bcf last year and only 84 Bcf in 1990. Meanwhile, pipeline capacity is estimated to have reached 94 Bcf/d in 2000, up from 89.4 Bcf/d in 1998.

"These are very strong fundamentals, which indicate a solid market response by the gas industry to increasing customer demand for this efficient, domestic fuel," said Chris McGill, AGA managing director of policy analysis. "North America holds a vast supply of potential natural gas resources," he added. "The challenge is producing natural gas in sufficient quantities to meet growing customer demand, and ensuring that the pipeline delivery system expands enough to get the gas where it's needed." The full text of the five-page supply report is available online to those who subscribe to AGA's "Stats and Studies" series (www.aga.org).

AGA Lowers Demand Forecast, Raises Price Projections

AGA also released an updated outlook on long-term demand growth and gas prices last week. After a re-examination of its prior forecasts in light of the upheaval in the energy markets last year, the AGA concluded that its prior gas demand projection may have been a bit too high, and its price forecast quite a lot too low. In an update of its February 2000 report "Fueling the Futures: Natural Gas and New Technologies for a Cleaner 21st Century," AGA said demand now is projected to grow 53% (up 33.6 quadrillion Btus) by 2020 rather than the 60% (35 quads) it projected earlier and prices should reach $5.60 in 2020.

AGA noted that in its prior forecast it expected gas prices to average in the mid $2/MMBtu with only modest price fluctuations over the next 20 years. Shortly after that forecast was made gas prices went through the roof. Spot prices averaged about $3.60 in 2000 but by December had soared to $10. They have come back down since then but remain nearly double AGA's prior forecast. Crude oil prices also defied most predictions last year by reaching $30/bbl a year after being near $10/bbl. Other energy prices also followed suit.

"Most analysts believe that energy prices will retreat from the peaks witnesses in late 2000 but there is little agreement on how far they will retreat, when they will reach a new equilibrium point and what Changes we should expect as a result of the long-term price outlook," AGA said. "In light of this uncertainty, this update reexamines the results of Fueling the Future within the context of higher energy prices."

AGA now assumes gas prices will be 36% higher than its prior forecast of $2.65 in 2020. It expects wellhead prices to average about $3.25 in the near term and rise to $3.60 in 2020. When the impact of inflation is included, prices are expected to reach $5.60 in 2020. In comparison, EIA is expecting prices to average (before considering inflation) about $3.13 in 2020.

AGA assumes oil prices will be 25% higher than its prior forecasts of $18.45/bbl, reaching $23 (1999 dollars) in 2020, or $40.17/bbl considering the effects of inflation. It still sees coal prices at $1.22/MMBtu, but it raised its forecast on power by 10% to 7/3 cents/kWh, or 11.5 cents after inflation.

Even with higher wholesale gas prices, demand is still forecast to grow to 33.6 quads (roughly 33 Tcf) from 22 quads today. But a slower growth rate is expected in particular in the industrial and power generation sectors, which can substitute fuels more readily than other sectors such as residential and commercial. Industrial consumption is 1 quad lower in AGA's new forecast.

AGA also has a somewhat different perspective now on long-term gas supply. It predicts there will be less reliance on lower-48 production and a new turn toward Alaskan reserves, liquefied natural gas and frontier Canadian prospects. It's update doesn't indicate any lessening of confidence in the lower 48, but higher prices make the frontier areas and LNG more economic sources of supply, AGA said. It sees 26.6 quads of production coming from domestic basins in 2020 rather than 29.5 quads, with the remainder coming from Alaska (1 quad) and Canadian and LNG imports (6 quads).

"The higher prices and market volatility of 2000 suggest a more fragile market than we believed existed a year ago. But the future presented in Fueling the Future remains attainable, and the potential benefits are highly desirable...," AGA said in its report.

"Certainly, recent increases in the wholesale price of natural gas have reduced demand, but the fundamental strength of the natural gas resource base - coupled with new technologies and competition - will ensure long-term growth for this abundant, efficient fuel," said Paul Wilkinson, AGA vice president for policy analysis.

The full text of the 12-page, 2001 Update can be found at www.fuelingthefuture.org. Printed copies are available by calling AGA's Public Relations office at (202) 824-7211.

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