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Producers Can Meet 32 Tcf Market in 2015, GRI Says

August 31, 1998
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Producers Can Meet 32 Tcf Market in 2015, GRI Says

The Gas Research Institute (GRI) last week projected domestic natural gas consumption will rise by about 30%, or 9.5 quadrillion Btus (quads), to nearly 32 quads by 2015. It predicts producers, both in the United States and Canada, will be able to rise to the demand challenge, but it concedes the road ahead won't be easy as producers face low gas acquisition prices in the early 2000s and the possibility of having to achieve an even higher demand level if the restrictions on greenhouse gas emissions in the controversial Kyoto accord are ratified. Significantly, the institute also sees natural gas - which in the past has been considered the step-sister of crude oil - becoming the more "dominant" source of revenue for producers in the early 2000s, helping to offset the effects of depressed crude prices on producers' cash flows.

Gas demand is expected to grow at an annual rate of 2% between 1997 and 2015, outstripping the 1.8% annual growth rate anticipated for all U.S. energy consumption during the same period, according to the annual GRI Baseline Projection of U.S. Energy Supply and Demand study that was issued at a press briefing in Washington D.C. Gas would lag behind oil's share (43.9 quads) of the overall energy market by 2015, but it would out-distance coal (27.1 quads).

When examined by sector, about three-quarters of the projected demand growth for gas by 2015 will come from power generation (3.3 quads in 1997 to 7.3 quads by 2015) and industrial (from 10.1 quads to 13.3 quads), with the balance from the residential (5.1 quads to 5.8 quads) and commercial markets (3.4 quads to 4 quads). Coal is expected to maintain its dominance in the key electric generation market, rising from 18.5 quads in 1997 to 24.5 quads by 2015, largely due to its lower costs.

To achieve a 32 Tcf market, GRI estimated gas producers must be prepared to add 0.5 Tcf annually over an 18-year period, which it believes is doable. It noted the gas industry faced a much tougher challenge than this in the period spanning from the mid-1950s to the early 1970s when it successfully added a total of 13 Tcf, or 0.8 Tcf a year, to the nation's natural gas supply. This time around producers have the advantage of advanced drilling technology, such as 3-D and 4-D seismic technology, horizontal drilling techniques and deep-water capabilities, GRI said.

But GRI concedes that a potential problem would arise if the greenhouse gas emissions restrictions called for under the Kyoto accord are placed into effect during this period. Some energy analysts already have begun to project that the gas market could exceed the 30-Tcf level much earlier than anticipated - by 2010. But GRI said it doesn't see this happening until "several years later" under its current projection. If the Kyoto accord is ratified, however, it conceded the 30-Tcf hurdle might have to be moved up by about five years. This would put pressure on gas producers to work harder to add 0.8 Tcf of gas a year, rather than 0.5 Tcf a year, to the nation's gas supply, and would create an "upward bias" in gas prices.

In its study, GRI proposed several scenarios for reducing carbon dioxide emissions in the electric generation, industrial and transportation sectors that could potentially result in an increase in gas demand by more than 8 quads by 2015, or almost $23 billion in additional revenues.

GRI sees the gas supply to the lower 48 states rising from 21.5 Tcf in 1997 to more than 30 Tcf by 2015 - about even with the expected demand assuming that the Kyoto accord isn't ratified. It estimates 55% of the increase in production will come from the offshore, specifically the Gulf of Mexico and the Norphlet. By 2015, GRI said production from the Gulf alone will reach 9 Tcf, up from about 5 Tcf in 1997. Onshore production will grow 20% to 16.9 Tcf by then, with much of the growth taking place in the West - particularly in the Rockies, Overthrust Belt and the San Juan Basin. Other key producing areas will be Appalachia and North Central (includes the Great Lakes region and areas as far west as South Dakota and as far south as Arkansas), with gas output expected to almost triple to 2.9 Tcf by 2015.

The GRI study said infrastructure constraints will pose few, if any, problems for onshore and offshore drilling during this period. Gas imports, mainly from Canada, are projected to grow 14% to 3.5 Tcf by 2002, and then are likely to "remain relatively flat due to limitations on the availability of competitive Canadian supplies."

In the long term, Gulf producers are "going to win out in [the] competition" with Canadian producers over U.S. market share, said John C. Cochener, principal analyst for the Resource Evaluation Baseline/Gas Resource Analytical Center. He believes lower cost production from the Gulf is "likely to overwhelm" Canadian producers in the end.

The toughest challenge for producers will come in the early 2000s when they will face deteriorating cash flows and wellhead prices, GRI said. "When the low point is reached, it is uncertain how producers will react in such a pessimistic environment. Will they retrench and cease making E&ampP investments or will they continue investing for the long term? How producers react to the uncertainty at this juncture will determine the degree to which the supply requirement is fulfilled." This is particularly crucial since about 35% of the projected gas supply by 2015 will depend on investments in new technology, GRI noted. Without such investments, it predicted domestic gas supply by 2015 will be less than what it was in 1997.

Gas Overtakes Crude

GRI predicts the downward direction will reverse itself in 2005, with gas for the first time in the United States becoming a bigger contributor to the cash flows of producers (at least 50%) than crude oil (30-40%). It estimates natural gas will account for $55-$60 billion of producers' revenues by 2015, helping to offset depressed crude oil prices. In addition, real gas acquisition prices (wellhead plus gathering) are expected to rebound in the post-2005 period. These factors, according to GRI, will help to spur exploration and production (E&ampP) activity.

GRI sees real gas acquisition prices beginning their softening trend within the next few years as new Canadian supplies - both from Alberta and Maritime Provinces - come to market and as new production from the deep-water Gulf begins. It predicts real acquisition prices will fall from about $2.31/MMBtu in 1997 to $1.95/MMBtu, and then will rebound reaching about $2.30 per MMBtu by 2015. But despite the rebound, it said weighted real burner-tip gas prices will fall from $4.34/MMBtu in 1997 to $3.87 per MMBtu by 2015.

The reason for the anticipated "steady decline" in the weighted average real burner-tip price will be owing to the "gradual erosion" of the real transmission and distribution (T&ampD) margin over time, according to GRI. While the nominal T&ampD margin (the difference between the acquisition price and the burner-tip price) is expected to rise from $2.03/ MMBtu in 1997 to $2.76 per MMBtu in 2015, the rate of increase (less than 1.7% a year) is likely to lag inflation so the real T&ampD should drop from $2.03/MMBtu of delivered gas in 1997 to $1.59 per MMBtu by 2015, the study noted.

The decline in the real T&ampD margin, GRI said, will be due to three factors: 1) a change in gas customer mix, with a greater portion of total gas sales going to large-volume industrial and electric generation customers; 2) with the completion of the Maritimes &amp Northeast Pipeline, the transmission distance to market, competitors and customer mix (more high-volume customers) are expected to change dramatically in the Northeast, driving down T&ampD margins in both the New England and Mid-Atlantic states; and 3) expected continued technology improvements and operation and management (O&ampM) cost reductions are expected to hold down future cost increases.

On a related issue, GRI noted investments in new pipelines to balance out supply and demand in the United States are consistent with historical levels on an annual basis. It estimated $12.8 billion of new pipelines representing 22.7 Bcf/d of additional capacity will be needed in the United States between now and 2015, including $4.1 billion to bring in Canadian imports, $1.8 billion to transport offshore gas, $2.2 billion in the Rockies, and $4.7 billion for the rest of the United States.

The $12.8 billion investment is "roughly twice" the amount spent on new pipelines between 1991-1997, GRI noted, but it will be spread out over double the number of years. "On an annual basis, this equates to approximately $750 million (1997 dollars) per year in each time frame. Thus, future annual investment requirements are fairly comparable in each period."

Susan Parker

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