NGI The Weekly Gas Market Report
Think anything but gas is the way to go for the energyindustry’s future? Forget about it. Gas is where it’s at and whereit will continue to be for some time, Coastal CEO David Arledgetold a room full of producers in Houston at the Texas IndependentProducers & Royalty Owners Association’s (TIPRO) luncheon lastweek.
Arledge was talking tall following the release of 1998 earningsthat set a new record for the company (see NGI Feb 1, 1999). Why isgas so great? Arledge spelled out his reasons, chief among them isexpected demand from the power generation sector. “You can build amodern, gas-fired, combined-cycle plant for one-half the cost inone-third the time on less than one-fifth the land with 40% moreefficiency than a coal plant.” Also, environmental regulations havecurtailed 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 gettingto it and getting it to market economically.
“Natural gas has regained its place as the preferred energysource for the future. The Department of Energy, among others,forecasts that by the year 2010, the demand for natural gas in theU.S. may grow to about 30 Tcf, an increase of about 2% a year. Theprimary driver of this growth is an anticipated 7-8% annualincrease 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 Gulfof Mexico is only about 14 Bcf/d. At these rates, in 12 years theU.S. will have consumed the current combined proved natural gasreserves of the United States, of Mexico, and Canada.
“I am not suggesting that there is not enough gas available tosatisfy the market. Sufficient developable reserves are available,and markets have a way of ensuring that demand and supply aresatisfied. It’s called price. Prices at or below $2.00 causeproducers to slow or halt drilling activity, reducing supplies.Prices above $2.00 result in increased exploration drilling anddevelopment activity.” The current gas market is weighed down bylittle to no winter, and significant storage overhang, Arledgenoted.
But the future looks bright, or at least reasonable for gasprices. Reserve decline rates have increased substantially fromhistorical averages. “Typical decline rates for Coastal’s new wellsin South Texas and in the Gulf are as high now as 50-60% during thefirst two to three years of production. [We’re] drilling for lessand producing the hell out of what we’ve got.” Add to this thecurrent depressed drilling activity and the diminished ability ofgas users to switch to fuel oil, and you have a market poised forrapid recovery later this year, Arledge said. “When this occurs webelieve we will see a resurgence in drilling activity.
“While supplies will not automatically increase to meetoptimistic long-term demand forecasts, a reasonable price rangesomewhere between $2 and $3 will create the incentive necessary forsupply to meet demand.”
Over the next 10 years, Arledge said he believes gas prices willbe between $2 and $3. If prices average in the $2.25 to $2.50range, as he thinks they will, Arledge said the industry should beable to reach close to a 30 Tcf market. “The supply will bedeveloped and the pipelines constructed to position the gas at theexpanded market. In any event, during this time period the gasbusiness will be the best business of all areas of the energyindustry in North America.”
Joe Fisher, Houston
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