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NPC Official: Demand Probably Underestimated

NPC Official: Demand Probably Underestimated

The chairman of the gas demand task force of the National Petroleum Council (NPC) said last week his projections of a 30 Tcf market by 2010 in the December NPC study on natural gas "might have grossly underestimated inherent demand." The growth of gas fired power generation has caught everyone by surprise and could have the unexpected effect of causing net gas withdrawals from storage during the summertime as early as next year, said Matthew R. Simmons, president of Simmons & Company International.

Testifying before the Senate Committee on Energy and Natural Resources on behalf of the NPC, Simmons issued an alert that the "explosive growth" in planned new gas-fired electricity generating plants could cause the 28 to 30 Tcf market for natural gas demand to "arrive in half the time" envisioned by the NPC report.

"Should this high demand come much sooner than 2010, there is little way for this much new supply to be added so fast," he said. "In fact some extremely knowledgeable industry executives and analysts privately worry that the ambitious goals of reaching 29 to 30 Tcf of natural gas supply by 2010 might be a real stretch even [if restrictions on drilling access to federal lands] and other regulatory issues are cleared away. The decline curves for too many basins around the country are so high, and still rising, that it takes an increasing amount of drilling to simply keep the current production base flat."

The primary reason for Simmons possibly underestimating the demand for natural gas was "misjudging the rapid growth in orders for new gas-fired turbines. This has caught virtually everyone, including the manufacturers of these efficient electricity-manufacturing units, by surprise," he noted. He also said there is confusion about how often these new gas turbines will be running. A booming economy, greater environmental restrictions and fewer coal-fired and nuclear power plants operating will ensure that new gas-fired plants run a lot more than previously expected.

"When all these changed assumptions are calculated into a revise demand model, the 30 Tcf gas needs could jump ahead by half a decade."

As these new gas-fired plants get hooked up, "the reliability of the North American gas storage system could also be called into question," said Simmons. "A case can be made that America could start to see gas withdrawal from our storage system during the summer months as early as next year or the following year at the latest... The dynamics of such a scenario require either a major increase in daily gas production during the shoulder months or we risk literally draining the natural gas storage system over the course of one to three years of winter and summer storage withdrawal."

This "energy conundrum" can only be solved by an increase in drilling, including access to off-limit areas in the Gulf and the Rocky Mountain regions, said Simmons. But it also requires that more rigs are built and many more people are added to the workforce. If those things cannot be accomplished, the electricity industry will be forced to turn to new LNG import terminals, more coal-fired power plants, new nuclear plants and more dams for hydropower, all of which will take the "better part of a decade to accomplish."

Committee Chairman Sen. Frank Murkowski (R-AK) said the hearing yesterday should serve as a "wake-up call" to the American people on what he called the coming "crisis" in the natural gas market. If the Clinton Administration maintains the status quo of restricting drilling access to federal lands offshore and onshore, there simply will not be enough natural gas to meet the demand projected, Murkowski warned in the third hearing he has held on the subject.

Nation's 'Energy Eggs' in 'Natural Gas Basket'

"Here's the problem as I see it: We've put all our energy eggs in the natural gas basket, but we have not concentrated on producing more eggs," he said in a statement.

Using several administration officials as verbal punching bags, Murkowski highlighted the contradiction between the projected booming market for natural gas and the administration's policy, or lack of policy, on natural gas.

"If it is the official administration policy for the nation to use more natural gas, why is the government working so rapidly to make natural gas tougher to produce here at home?" The Department of the Interior has been placing domestic sources of natural gas off limits. The Forest Service is about to make more than 40 million acres off limits through its roadless policy. And the Vice President said he would do everything in his power to stop new outer continental shelf (OCS) oil and gas drilling even in areas already leased by previous administrations, Murkowski said.

As one example of the administration's failed approach, he referred to the regulatory Catch-22 that has left the Destin Dome project in limbo. Chevron, Conoco and Murphy Exploration & Production earlier this week filed a breach-of-contract lawsuit against the government, charging that the Commerce Department and the Environmental Protection Agency created a regulatory stalemate, in which each agency said it could not move forward in its review of Destin Dome 56, located 25 miles offshore Pensacola, FL, without a favorable decision by the other (see related story this issue).

"Are you going to encourage gas development or not?" Murkowski rhetorically asked the administration representatives.

"While the Department of Energy has been doing great things to promote natural gas technologies and use, DOE owns no land. No matter how right DOE is about natural gas, unless other departments are singing the same tune, our nation is heading for disaster," he said.

T. J. Glauthier, deputy secretary of DOE, David Hayes, deputy secretary of DOI, and Mary Hutzler, director of integrated analysis and forecasting for the EIA, all attempted to convince the chairman of the administration's honest efforts to increase domestic supply of natural gas. But Murkowski simply wasn't buying it.

Glauthier reported, however, that an Interagency Working Group on natural gas has been established at the White House under the leadership of the National Economic Council and held its first meeting last week. Forming the group was a recommendation of the recent study on natural gas by the National Petroleum Council.

Among other things, Glauthier added that the DOE, BLM, Forest Service, Fish and Wildlife Service, the National Park Service and the Bureau of Indian Affairs have formed a research group to develop ways to streamline the environmental review process that must occur before drilling can be allowed on federal lands in the Rocky Mountain region. He also said the BLM is looking at lifting the drilling ceiling in the Powder River basin by 5,000-7,000 more wells.

But Murkowski said it's a case of too little, too late. The market evidence of this failed approach already is rearing its ugly head in the form of sharply higher gas prices. Prices already doubled this year, he noted.

The projection that gas prices are coming down in a year to 18 months doesn't mesh with the reality that the gas industry needs to invest $1.5 trillion over the next decade in gas infrastructure to meet demand, he said. "We're setting ourselves up for a crisis on gas."

G. Warfield Hobbs, testifying on behalf of the American Association of Petroleum Geologists, noted that there is plenty of natural gas to be found in the United States, enough for 50 years at a demand rate of 32 Tcf/year. However, only 10% (157 Tcf our of 1,466 Tcf) of the resource is classified as proven reserves. There is an additional 313 Tcf in Alaska, for a total of 1,779 Tcf in the U.S., but without a pipeline, Alaskan gas won't be helping the U.S. market.

In addition, most of the prospective areas for major new gas discoveries are on public lands where federal law prohibits exploration. Using a map from the December NPC report, Hobbs noted that 213 Tcf of gas reserves is currently off limits because of federal law, and it is likely that the resource in those areas would grow significantly if exploration was allowed to take place.

He recommended multiple changes to the government's policies on public land access, including lifting the OCS moratorium and opening up the restricted areas (1002) of Arctic National Wildlife Refuge. He also recommended regulatory reforms to streamline the permitting process, change the wetlands rules of the Clean Water and Endangered Species acts and improve DOI's management procedures in the Rocky Mountain region.

Murkowski lauded those suggestions. "I feel very strongly that this administration has not been forthcoming in leveling with the American people about the realities associated with gas," he added. "Gas is not going to be, in my opinion, just an automatic alternative to other sources of energy. We need to balance all our energy sources to [meet demand] or I think there's going to be an energy shortage. It's going to affect the economy and is going to affect inflation."

Rocco Canonica

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