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Coastal CEO: Gas Is The Future

Coastal CEO: Gas Is The Future

Think anything but gas is the way to go for the energy industry's future? Forget about it. Gas is where it's at and where it will continue to be for some time, Coastal CEO David Arledge told a room full of producers in Houston at the Texas Independent Producers &amp Royalty Owners Association's (TIPRO) luncheon last week.

Arledge was talking tall following the release of 1998 earnings that set a new record for the company (see NGI Feb 1, 1999). Why is gas so great? Arledge spelled out his reasons, chief among them is expected demand from the power generation sector. "You can build a modern, gas-fired, combined-cycle plant for one-half the cost in one-third the time on less than one-fifth the land with 40% more efficiency than a coal plant." Also, environmental regulations have curtailed the ability of generators to switch between gas and oil, making gas more attractive. There's plenty of gas in the ground, Arledge said, which leaves producers with the challenge of getting to it and getting it to market economically.

"Natural gas has regained its place as the preferred energy source for the future. The Department of Energy, among others, forecasts that by the year 2010, the demand for natural gas in the U.S. may grow to about 30 Tcf, an increase of about 2% a year. The primary driver of this growth is an anticipated 7-8% annual increase in electric utility consumption of natural gas. Daily U.S. consumption will rise from 60 Bcf/d to over 80 Bcf, a 33% increase. To put that in perspective, current production from the entire Gulf of Mexico is only about 14 Bcf/d. At these rates, in 12 years the U.S. will have consumed the current combined proved natural gas reserves of the United States, of Mexico, and Canada.

"I am not suggesting that there is not enough gas available to satisfy the market. Sufficient developable reserves are available, and markets have a way of ensuring that demand and supply are satisfied. It's called price. Prices at or below $2.00 cause producers to slow or halt drilling activity, reducing supplies. Prices above $2.00 result in increased exploration drilling and development activity." The current gas market is weighed down by little to no winter, and significant storage overhang, Arledge noted.

But the future looks bright, or at least reasonable for gas prices. Reserve decline rates have increased substantially from historical averages. "Typical decline rates for Coastal's new wells in South Texas and in the Gulf are as high now as 50-60% during the first two to three years of production. [We're] drilling for less and producing the hell out of what we've got." Add to this the current depressed drilling activity and the diminished ability of gas users to switch to fuel oil, and you have a market poised for rapid recovery later this year, Arledge said. "When this occurs we believe we will see a resurgence in drilling activity.

"While supplies will not automatically increase to meet optimistic long-term demand forecasts, a reasonable price range somewhere between $2 and $3 will create the incentive necessary for supply to meet demand."

Over the next 10 years, Arledge said he believes gas prices will be between $2 and $3. If prices average in the $2.25 to $2.50 range, as he thinks they will, Arledge said the industry should be able to reach close to a 30 Tcf market. "The supply will be developed and the pipelines constructed to position the gas at the expanded market. In any event, during this time period the gas business will be the best business of all areas of the energy industry in North America."

Joe Fisher, Houston

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