Diversity of supply adds up to security of supply, Tim Bullock, president of BP Gas and Power North America, told about 1,200 Rocky Mountain producers gathered in Denver Tuesday. “We’re going to need all of it, all sources of supply, including Alaskan gas and LNG, if we’re going to keep the price of natural gas at a level that allows demand to continue to grow,” he said.
During this transition time, while new supply sources are developed, the U.S. rig count will have to stay above 950 just to keep supply flat, Bullock said. He believed analysts’ predictions of a 5% a year production decline “are too pessimistic,” saying conservation and fuel switching also have a role to play in maintaining a supply-demand balance. Bullock keynoted the Rocky Mountain Natural Gas Conference hosted by the Colorado Oil and Gas Association.
The BP executive blamed the huge and sudden increase in demand from power generators for the current disequilibrium in the market. While the current North American market runs about 70 Bcf/d, additional load from new gas-fired power plants, in operation or under construction, is taking or will take a huge slice of the market. He estimated that the new power load, if all fired up at once, would add about 45 Bcf/d of demand.
Bullock said BP, the largest natural gas producer in North America, and other producers all were seeking to increase production. “The short-term market is working. Producers are drilling more,” and prices have rebalanced the market to allow a robust storage fill. “Prospects for the winter look a lot brighter. Storage is back in the traditional range and 3 Tcf [in storage before winter] seems a good possibility.”
The price being paid for that storage is just that — a higher price. “Customers don’t like price volatility,” Bullock said, but volatility may be part of the picture for the next couple years until the market rebounds and supply increases. Gas prices also currently are getting a boost from oil prices, which he said are high as part of the aftermath of the Gulf war and “an unprecedented” level of cooperation among OPEC members.
Questioned about the loss of industrial customers, he said he didn’t think current chemical plants would be closed, but possibly new ones would be built elsewhere.
Bullock said he believed liquidity was beginning to come back into the gas market through the growth of regional marketers, but it’s in a “trough” and could take two years to return to the optimal level.
Speaking as part of a panel discussion, Michael Zenker, senior director of North American natural gas for Cambridge Energy Research Associates, said for the gas market, “the next five years — through 2007 — will be the most critical period…By the middle of the decade there could be the erosion of an amazing amount of additional demand.”
Zenker said CERA did not believe the current downturn in prices would continue. “We will see strong prices going forward and greater volatility.” He pointed to an accelerated decline in supplies from the Gulf of Mexico and predicted that the drilling boom currently going on would have disappointing results. “We don’t expect a big supply response,” Zenker said. “What this tells us is the resource base is becoming inflexible.” He likened the current situation to the drilling boom of 2000-2001, which also showed disappointing results.
CERA projects aggregate Lower 48 production will only grow 1 Bcf/d by 2007 with most of it coming from the Rockies. However, after 2007, the group believes production will decline by a total of 2 Bcf/d by 2010. Zenker added that Canadian production is forecast to grow by 1 Bcf/d by 2010.
These figures should hold unless there is some major new supply brought on by greatly increased land access, improved permitting or new technological development. Zenker said that during this period, the greatest threat to the natural gas industry will be the political risk.
As for LNG, Bullock said he believes the resource in the long term will make “the whole world a supply source” and have a stabilizing influence on prices. Shipping is the key expense in LNG because the huge double-hulled tankers are so expensive to build. That means the economics are based on how far away the supply is. For instance, he said, supply coming from Indonesia could carry a $1-1.50/Mcf premium over LNG from nearby Trinidad.
Keith O. Rattie, CEO of Questar Corp., challenged other panelists’ conclusions about LNG’s rosy future in the United States. With Trinidad’s capacity expected to decline in a few years, he pointed out that the other source countries of LNG out there include some of the most politically unstable and inhospitable to investment, including Algeria, Venezuela and the Persian Gulf region.
He added that countries such as Japan, Korea and Taiwan, which have no other sources of gas, will bid the price of LNG up to levels that will make it uncompetitive in the United States, noting that he also expects India and China to up their use of natural gas going forward. Rattie said it was “a colossal mistake” to assume the U.S. would have a much greater share of LNG going forward.
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