Frontier E&P Expected to Escalate

Frontier market activity is increasing across the board for North American natural gas producers who have begun pouring more resources into deepwater Gulf of Mexico, Atlantic Canada and the Arctic to complement the increasingly stronger plays onshore. Still, bureaucracy is hindering the ramp up for new exploration and production that could hinder supplies into the future, warned some energy experts last week.

Market forces have finally collided, creating opportunities for producers to increase production in new areas across North America, said Thomas R. Robinson, managing director of the Cambridge Energy Research Associates. Robinson, who shared a panel at CERAWeek 2001 in Houston with executives from El Paso Corp., Shell Gas and Power, Devon Energy Corp. and TotalFinaElf, said there is a "new drive to develop several very prospective, long-term supply frontiers."

Less than 10 years ago, North American producers were talking about inventory management, he said. He now sees a shift in E&P philosophy, especially in the past year. Because of consumer price spikes from a cold winter and problems in certain industrial sectors hit by high gas prices, "now, there is shock, and the result is reaction."

Robinson warned that frontier exploration and production still will be difficult, but added that "more gas is being developed and prices will come down. It's not going to happen over night. It's going to take a long time to work through the system, and this political and policy debate on the role of gas in the nation's economy and energy mix will continue."

Devon Energy CEO J. Larry Nichols, who called for opening more U.S. frontiers to new exploration, said the "day of reckoning came in fourth quarter 2000 when at long last natural gas had the full attention of the public." He said the coldest winter in years combined with a "supply cushion that had eroded away" was something producers have cautioned about for several years.

"The real crisis occurred two years ago," Nichols said, when there were low natural gas prices and no growth in the industry. "We didn't develop the frontiers. We didn't develop the experience we need. Now we have a shortage of people. We have a shortage of drilling rigs." Despite the shortfall two years ago, Nichols placed most of the blame at the feet of politicians.

"Bad government policy" is a fundamental reason for the high gas prices today, Nichols said. "All forms of energy were under attack for far too long," he said, referring to the Clinton Administration's policy of designating more areas off limits to development, especially areas with suspected natural gas reserves. Nichols said opening the frontiers would be a more difficult problem to fix, but he said he was encouraged by the Bush Administration's stance on securing U.S. energy supplies.

"We're not able to drill wells where we're able to drill wells. Once the signals are set, industry will respond quickly," Nichols said.

El Paso Corp. CEO William Wise, who said he was concerned about the flat natural gas production over the past several years, said the industry faces a challenge in providing deliverability. Though his company concentrates on developing the resources it has, Wise told the audience that producers "have to hit the frontiers" as part of an overall plan for the future.

Shell Gas & Power CEO Linda Z. Cook called the United States unique in that more than half of its natural gas supply comes from small independent producers, with about 16% from Canada. To encourage more development, she thinks there will be liberalization in the marketplace. "There is a clear trend" toward that, she said.

Carolyn Davis, Houston

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