Normal temperatures have returned to North America, but naturalgas usage, which powers nearly three quarters of the continent,remains high, said El Paso Corp.’s John Somerhalder II, who made itclear that the market will continue to grow at a rapid rate — buthe muddied his forecast by questioning where the gas would befound, calling the “challenges more severe than we anticipated.”

Speaking at the 11th Annual Houston Energy Expo Wednesday,Somerhalder, president of the Houston-based corporation’s pipelinegroup, talked of the many opportunities and challenges facing theenergy industry, saying the business was at a crossroads that willlong impact the entire U.S. economy.

“It is going to be difficult to ramp up to meet the growingdemand,” Somerhalder said. “We have seen the negatives that occurwhen we are short on demand. It’s an extraordinary time in theenergy industry.”

With charts to illustrate North America’s growing reliance onnatural gas for power generation, Somerhalder said that currently,it is used for about 72% of the power generation in the UnitedStates, Mexico and Canada, a figure that he said shows no signs ofdeclining.

Somerhalder predicted that by 2015, natural gas demand in NorthAmerica will be at 43 Bcf/d. “Can we grow that sort of demandthrough traditional supply?” he questioned, noting that productionhad remained fairly flat despite increased use. “We need to growsupply every year about 2 1/2 Bcf/d, and we are only growing about1 Bcf/d.”

To secure enough natural gas in North America, Somerhalder saidproducers needed to tap the frontier sources here, including therich areas of the Western Canadian supply basin, the deep-waterGulf of Mexico, the Rocky Mountains, Mexico and the Arctic region.

Negating criticism that it could be too expensive to transportnatural gas from the Arctic region, Somerhalder said supplies fromPrudhoe Bay could be brought to the Chicago region at a capitalcost “in the $3.16 range.” From Eastern Canada’s Sable Island,supplies could be transported to the Boston region for “about$3.12” in capital costs, he said. Likewise, supplies from thedeep-water Gulf of Mexico to Atlanta would run about $2.94.

“If you add up the frontier projects, though, we still will beshort, not only in the short run, but also in the long run,” hewarned. And because of that shortage, he said the most likelycandidate to “fill the gap” would be liquefied natural gas,transported from regions around the world.

“There is growing evidence that LNG needs to play a role,”Somerhalder said. “There have been significant technologicalimprovements in the past decade, and LNG will be viable at severalstrategic locations for North America. We think there are about 700Tcf of trapped proved gas reserves at these locations, and LNG willbe a bigger part of the supply mix in the future.”

In February, El Paso announced a major LNG initiative for NorthAmerica (see Daily GPI, Feb. 6), withplans to build six facilities over the next five years at a cost of$1.5 billion. Two weeks ago, El Paso signed a letter of intent topurchase LNG from a new Australian production facility to be built byPhillips Petroleum Co. (see Daily GPI,March 9). The deal would provide up to 4.8 million tons of LNGbeginning in 2005 for North American markets.

Somerhalder noted that the cost of LNG tankers is “dropping,”and said more efficient technology has led to a 30% decline in thecost of putting LNG into a pipeline, which he said is now less than$1.80/Mcf in capital costs (not the commodity itself). Thetransport distance from North American LNG facilities would makethe current niche fuel “very competitive,” he said.

Assuming the transport distance was less than 2,500 miles fromfacilities in proposed locations like Trinidad and the Bahamas, LNGwould still be competitive, he said, referring to proposals by othercompanies, including Enron Corp. which announced another LNG terminalproposal in January, saying it was considering development of animport terminal in the Bahamas, connected by a 90-mile pipeline toFlorida (see Daily GPI, Feb. 9).

With a reduction in costs, he said he expects North America’sLNG market to grow from its current .05 Bcf/d to 2 Bcf/d once theexisting North American terminals are all up and running. Then,once the proposed new LNG terminals are completed, Somerhalder saidLNG could account for about 5 Bcf/d, which would play a”significant role in bridging the gap.”

The North American natural gas market can grow, he said, but the”conventional production regime is stressed. We can tap thefrontiers, but LNG will play an increasing role to meet NorthAmerica’s demand.”

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