Although many have questioned the causes of the recent price spike beyond $7/MMBtu, the federal government’s long-term natural gas forecast released Tuesday makes it clear that the gas market has become, and will remain, tighter and more prone to higher prices than previously expected.

The Energy Information Administration’s (EIA) Annual Energy Outlook 2004 (AEO2004) forecasts lower gas demand and higher gas prices than what was projected last year. It also forecasts less domestic gas production and less imported gas from Canada.

“For almost four years, natural gas prices have remained at levels substantially higher than those of the 1990s. This has led to a reevaluation of expectations about future trends in natural gas markets, the economics of exploration and production, and the size of the natural gas resource,” EIA said. “The AEO2004 forecast reflects such revised expectations, projecting greater dependence on more costly alternative supplies of natural gas, such as imports of liquefied natural gas (LNG), with expansion of existing terminals and development of new facilities, and remote resources from Alaska and from the Mackenzie Delta in Canada, with completion of the Alaska Natural Gas Transportation System and the Mackenzie Delta pipeline.”

Total natural gas supply is projected to grow to 31.3 Tcf in 2025, or about 3.3 Tcf less than what EIA projected in its AEO2003 last year. Domestic natural gas production is projected to increase from 19.1 to 24.1 Tcf between 2002 and 2025, or about 2.8 Tcf less than in the forecast released last year.

EIA said its projections of conventional onshore production are lower because of slower reserve growth, fewer new discoveries, and higher exploration and development costs. In particular, reserves added per well drilled in the Midcontinent and Southwest regions are projected to be about 30% lower than projected in AEO2003.

Offshore natural gas production also is expected to be lower than previously thought because of the tendency to find more oil than natural gas offshore and higher costs than previously anticipated, EIA added. “Recent data from the Minerals Management Service show that about three-quarters of the hydrocarbons discovered in deepwater fields are oil, compared with 50% assumed in AEO2003.”

Conventional production onshore and offshore remains important, but its share of total supply is expected to be significantly lower that previously thought, meeting 39% of total U.S. supply requirements in 2025, down from 56% in 2002. Future supply growth will depend on unconventional domestic production, gas from Alaska, and LNG imports, EIA said. Total non-associated unconventional gas production is projected to grow from 5.9 Tcf in 2002 to 9.2 Tcf in 2025. With completion of an Alaskan gas pipeline in 2018, total Alaskan production is projected to increase from 0.4 Tcf in 2002 to 2.7 Tcf in 2025.

The four existing U.S. LNG import terminals (Everett, MA; Cove Point, MD; Elba Island, GA; and Lake Charles, LA) are expected to be expanded by 2007, and additional facilities are expected to be built, serving the Gulf, Mid-Atlantic and South Atlantic States, with a new small facility in New England and a new facility in the Bahamas serving Florida via a pipeline. Another facility is projected to be built in Baja California Norte, Mexico, serving the California market. Total net LNG imports are projected to increase from 0.2 Tcf in 2002 to 4.8 Tcf in 2025, more than double the AEO2003 projection of 2.1 Tcf.

Net imports of natural gas from Canada are projected to remain at about the 2002 level of 3.6 Tcf through 2010 and then decline to 2.6 Tcf in 2025 (compared with the AEO2003 projection of 4.8 Tcf in 2025). The lower forecast in AEO2004 reflects revised expectations about Canadian natural gas production, particularly coalbed methane and conventional production in Alberta, based on data and projections from the Canadian National Energy Board and other sources.

Average natural gas prices are projected to increase from $2.95/Mcf (2002 dollars) in 2002 to $4.40/Mcf in 2025 (equivalent to about $8.50/Mcf in nominal dollars). At $4.40/Mcf, the 2025 wellhead natural gas price in AEO2004 is 44 cents higher than in the forecast released last year.

The changes lead to a revised expectation about the fuel mix of future electric generating capacity additions and generation. Coal is now projected to play a more important role, particularly in the later years of the forecast, EIA said. Cumulative projected additions of natural gas-fired generating capacity are lower in the AEO2004 than they were in the AEO2003, and more additions of coal and renewable generating capacity are projected.

The higher natural gas prices also impact the demand for natural gas in the industrial sector, particularly in the energy-intensive industries. Total industrial demand for natural gas is projected to increase from 7.2 Tcf in 2002 to 10.3 Tcf by 2025, or 0.7 Tcf less in 2025 than in the forecast released last year. While industrial natural gas demand is lower in the AEO2004 due to the higher natural gas prices, output in the energy intensive manufacturing industries still grows at 1.6% per year from 2002 to 2025. The non-energy intensive manufacturing industries are expected to grow at a rate of 3.2% per year over the same period.

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