Barring the potential for additional gas demand that couldresult from the Kyoto global-warming accord, the Gas ResearchInstitute (GRI) yesterday projected that domestic natural gasconsumption will rise by about 30%, or 9.5 quadrillion Btus(quads), to nearly 32 quads by 2015. It predicts that producers,both in the United States and Canada, will be able to meet thedemand challenge, but it conceded that the road ahead won’t be aneasy one.

Gas demand is expected to grow at an annual rate of 2% between1997 and 2015, outstripping the 1.8% annual growth rate that isanticipated for all U.S. energy consumption during the same period,according to the GRI Baseline Projection of U.S. Energy Supply andDemand study that was issued at a press briefing in Washington D.C.By 2015, about three-quarters of the projected demand growth forgas will come from power generation (3.3 quads in 1997 to 7.3 quadsby 2015) and industrial applications (10.4 quads to 13.3 quads),with the balance from the residential (5.1 quads to 5.8 quads) andcommercial markets (3.4 quads to 4 quads).

To achieve a 32 Tcf market, GRI estimated that gas producerswill have to add 0.5 Tcf annually over an 18-year period, which itbelieves is achievable. It noted the gas industry faced a muchtougher challenge than this in the period spanning from themid-1950s to the early 1970s when it successfully added a total of13 Tcf, or 0.8 Tcf a year, to the nation’s natural gas supply.

But GRI concedes a potential problem would arise if the Kyotoaccord is put into effect during this period. Some energy analystsalready are projecting that the market will pass the 30-Tcf levelby 2010. GRI doesn’t see this happening until “several years later”under its current projection. But if the Kyoto accord is enacted,GRI said the 30-Tcf hurdle might have to be moved up by about fiveyears. This would put pressure on gas producers to add 0.8 Tcf ofgas a year, up from the anticipated 0.5 Tcf a year, to the nation’sgas supply, and would create an “upward bias” in gas prices.

Overall, GRI sees the gas supply to the lower 48 states risingfrom 21.5 Tcf in 1997 to more than 30 Tcf by 2015. It estimates 55%of the increase in production will come from the offshore,specifically the Gulf of Mexico and the Norphlet. By 2015, GRI saidproduction from the Gulf alone will reach 9 Tcf. Onshore productionwill grow 20% to 16.9 Tcf by then, with much of the growth takingplace in the West – particularly in the Rockies, Overthrust Beltand the San Juan Basin. Gas imports, mainly from Canada, areexpected to grow 14% to 3.5 Tcf by 2002, and then are projected to”remain relatively flat due to limitations on the availability ofcompetitive Canadian supplies.”

In the long term, Gulf producers are “going to win out in [the]competition” with Canadian producers over U.S. market share, saidJohn C. Cochener, principal analyst for the Resource EvaluationBaseline/Gas Resource Analytical Center. He believes lower costproduction from the Gulf is “likely to overwhelm” Canadianproducers in the end.

The toughest challenge for producers will come in the early2000s when they will face deteriorating cash flows and wellheadprices, GRI said. “When the low point is reached, it is uncertainhow producers will react in such a pessimistic environment. Willthey retrench and cease making E&P investments or will theycontinue investing for the long term? How producers react to theuncertainty at this juncture will determine the degree to which thesupply requirement is fulfilled.”

GRI predicts the downward direction will reverse itself in 2005,with gas for the first time becoming a bigger contributor to thecash flows of producers than crude oil. It estimates that naturalgas will account for $55-$60 billion of producers’ revenues by2015, helping to offset depressed crude oil prices. In addition,real gas acquisition prices (wellhead plus gathering) are expectedto rebound in the post-2005 period. These factors, according toGRI, will spur exploration and production (E&P) activity.

GRI sees real gas acquisition prices beginning a softening trendwithin the next few years as new Canadian supplies – both fromAlberta and Maritime Provinces – come to market and as newproduction from the deep-water Gulf begins. It predicts that realacquisition prices will fall from about $2.31/MMBtu in 1997 to$1.95/MMBtu, and then will rebound reaching about $2.30 per MMBtuby 2015. But despite the rebound, it said weighted real burnertipgas prices will fall from $4.34/MMBtu in 1997 to $3.87 per MMBtu by2015.

The reason for the anticipated “steady decline” in the weightedaverage real burnertip price will be owing to the “gradual erosion”of the real transmission and distribution (T&D) margin overtime. While the nominal T&D margin (the difference between theacquisition price and the burnertip price) is expected to rise from$2.03/ MMBtu in 1997 to $2.76 per MMBtu in 2015, the rate ofincrease (less than 1.7% a year) is likely to underperforminflation so the real T&D should drop from $2.03/MMBtu ofdelivered gas in 1997 to $1.59 per MMBtu by 2015.

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