While the Gas Research Institute maintains the most likelyfuture for natural gas includes low prices and a 31 Tcf market by2015, it is hedging its bets with a new study examining the outcomeif not all the expected pieces fall into place.

“Gas Supply Sensitivities: An Alternative View of Gas SupplyTrends” (GRI-99/0148) reviews the market if technologicalinnovations stall; if resource base estimates turn out to beover-stated; if producers reinvest fewer dollars in U.S. E&P;and if producers invest fewer dollars and require higher returnsfor higher cost offshore operations.

While GRI’s analysis shows it’s unlikely “that any of these fivealternatives will occur or be sustained for a prolonged period,”according to John Cochener, principal analyst, “unforeseen eventscould temporarily alter that view, which is why we assessed theimpact of various effects on supply and price.” This latest reporton alternative scenarios was issued about a year after GRIpublished its 1999 baseline projection last August. It was preparedfor GRI by Energy and Environmental Analysis Inc. in Arlington, VA.

For instance, if technological development were frozen at 1997levels “gas prices would have to rise dramatically to attract thesupply needed, resulting in as much as a 64% spike in wellheadprices by 2015,” GRI said. Or if its resource base estimate ofbetween 1,500 and 1,850 Tcf proved out to be overstated by 250 Tcfand prices stayed the same as projected, “lower-48 production woulddecline 14% vs. [GRI’s 1999] Baseline and would begin havingimpacts on markets as early as 2010.

Taken one step further, a 500 Tcf glitch in reserve estimates”would create a 28% shortfall in supply, with a significant impacton markets beginning in the near-term. To trigger needed productionwith the 500 Tcf reduction, wellhead prices would have to rise 68%- the largest price increase of any of the five alternative cases.”There would be more drilling, with the higher prices stimulatingdevelopment of more shallow offshore and non-conventional wells ashigher-quality offshore fields were depleted. Canada would becalled on for an added 1.6 Tcf in exports.

If producers moved decidedly away from their traditionalreinvestment average of 74% of domestic cash flow into domesticprojects, the decline in drilling funds could have a negativeimpact ranging from 8% to 12% on lower-48 production and a lesserimpact on Canada.

And a last alternative scenario – a lower reinvestment ratio,plus tripling the minimum rate of return required for offshoreprojects to compensate for increased risks – would trigger sharpdeclines in production and result in increases again of Canadianimports above the levels projected in the 1999 baseline study.

Producers eyeing a possible 68% price spike, however, shouldn’tbe too quick to corner the market on drilling rigs. Cochenerpointed out any spike would be short-lived. “It would last abouttwo seconds, then buyers would start to switch to resid or propane,or anything, and maybe your price increase would end up being 15%.”

Cochener said the current report goes into detail on items thatwere only briefly touched on in the original baseline. It’s “fordata hounds who want to play with the numbers and come up withtheir own results.” GRI’s next Baseline 2000 will not be publisheduntil the first of the year.

The GRI analyst commented on the widespread expectations of a 30Tcf market, and the debate going on among economists as to whenthat magic number will be reached. He pointed out that GRI came upwith 30 Tcf several years ago, predicting it would occur by 2015.In the last year, however, a number of analysts have predicted a 30Tcf market five years earlier, by 2010.

“We’ll never get there by 2010, Cochener said, advising thatneither GRI’s numbers nor those of the National Petroleum Council,which currently is preparing its own forecast, support “the 30 Tcfmyth.” Any time the models are run to achieve a 30 Tcf market by2010, “prices spike, gas loses market share and it backs off. It’slike the frog that keeps jumping halfway to the wall; he never getsthere.” The 30 Tcf market is likely to occur sometime between 2013and 2015, Cochener said, “later, rather than sooner.”

Meanwhile, in the short term, GRI’s baseline predicts naturalgas prices will fall in real terms from an average of $2.26/MMBtuin 1997 to $1.97/MMBtu (in 1997$) by 2005 as major new Canadianimports and growing Gulf of Mexico production hit the market. Afterthat real gas prices are projected to rise to about $2.10 in 2010and $2.30/MMBtu (in 1997$) by 2015. Using actual dollardenominations in the year they are paid those prices translate to$2.26/MMBtu in 1997; $2.21 in 2000; $2.40 in 2005; $3.02 in 2010;and $3.96 in 2015. Burner-tip prices will follow a slightlydifferent path, reflecting lower transmission and distributioncosts.

The report is available from GRI for $150 for members and $200for non-members. The study can be ordered from the GRI Documentfulfillment Center by fax at 630-406-5995. Call Kelly Murray forinformation at 703-526-7832 or e-mail at baseline@GRI.org.

Ellen Beswick

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