A new report by consultants at Boston-based Energy Security Analysis Inc. (ESAI) predicts that domestic gas production will grow by only about 0-2% per year over the next 10 years as new production largely offsets declining production from aging fields. As a result, domestic gas production could reach a peak around 2015.
“Even though the absolute gas production level is still high compared to historical levels, ESAI believes that domestic gas will peak at the end of our forecast horizon, like oil peaked in the early 80’s,” said ESAI’s Ye Zhang and Paul Flemming, authors of the special report titled North American Natural Gas Production Outlook.
“Current U.S. production does show signs of plateauing and possibly declining with existing resources. The opening up of land access and technology improvements can prolong this plateau stage or even provide some growth over the next 10 years, but over the longer run, ESAI believes U.S. gas production will decline.” ESAI expects domestic production’s share of total supply to decline to 80% by 2010 from 85% today, with LNG imports growing and Canadian and Mexican imports making up the remainder of supply.
One piece of evidence that domestic production is nearing a peak is the declining amount of gas supply per drilling rig. In the 1990s when the gas rig count averaged about 450, the amount of production per rig was about 42 Bcf. However, the increase in the average rig count to more than 800 rigs since 2000 has yielded only about 25 Bcf/rig in production. “For every 1% increase in rig count, the efficiency drops by 0.5%,” according to the report.
“This drop in efficiency is a good indication of basin exhaustion experience in many conventional plays. Unless there is more access to previously restricted but resource rich areas it will be more and more difficult for producers to increase production from existing resources.”
The decline in productive capacity provides even more support to ESAI’s conclusion. Productive capacity, which is the maximum production available from gas wells considering infrastructure limitations, fell to about 56 Bcf/d in 2001 from 61 Bcf/d in 1985 despite the increase in production over that same period to 52 Bcf/d in 2001 from 45 Bcf/d in 1985, according to ESAI.
“The decline in capacity can be attributed to a period of few incremental well completions during the 90’s combined with the treadmill effect of maturing basins,” the report said.
Meanwhile, wellhead utilization rates have climbed from about 75% in the mid-1980s to more than 90% since 2000. And whenever utilization rises beyond 90% gas prices escalate because of narrow margin of surplus capacity limits any available production response to a sudden demand increase. “If the capacity constraints are not relieved soon, the high price gas environment will persist.”
ESAI warned that there is a “high likelihood of prolonged capacity constraints” over the next four or five years which will cause gas prices to remain high and vulnerable to supply disruptions.
The report also finds that proved domestic gas reserves will grow only about 1% per year but could flatten or even decline without sufficient access to resources of continued investment in technological improvements.
Part of the reason for the downturn in domestic natural gas has been related the decision by production companies to divert cash flow from domestic drilling activities toward acquisitions, debt retirement, share buybacks and dividend increases. Wall Street has rewarded such behavior. Much of the cash flow that has gone toward exploration and production has been shifted overseas, ESAI said.
The report stresses that the U.S. energy bill can have a significant impact on the future of U.S. natural gas supplies. “President Bush rightly focused on four important objectives for the energy bill, including greater use of technology, increased domestic production, supply diversity, and a more reliable transmission-pipeline system,” ESAI said. “We believe that improved access to low cost supply in the Rockies, streamlined LNG terminal siting, and incentives for infrastructure development could go a long way to stabilizing the overall domestic supply picture.”
The recent success of the Alaskan National Wildlife Refuge budget resolution in Congress is a good first step in developing alternative indigenous supplies. However, ESAI points out that this enabling legislation is only the first step in delivering Alaskan gas to the lower 48 states, as significant strides will need to be made in developing the requisite pipeline infrastructure. Large potential Alaskan reserves should provide an impetus to overcoming the pipeline development hurdles, but ESAI believes that any such efforts will not begin to impact the U.S. markets until 2014.
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