|
Natural gas price part of global crisis BP, Wood Mackenzie tell Alliance supply, demand out of balance; Alaska gas needed, but recession may have pushed out date Kristen Nelson Petroleum News
Natural gas demand in the Lower 48 is down — and supply is up. That doesn’t sound good for a proposed Alaska natural gas pipeline which would deliver some 4 billion cubic feet a day into Lower 48 markets.
Brian Frank, president of BP Energy Co., BP’s commercial arm, and Ed Kelly, vice president, North American Gas and Power for energy consultant Wood Mackenzie, talked about the situation at the Alaska Support Industry Alliance annual “Meet Alaska” conference Jan. 23.
Both were of the opinion that the market situation for natural gas would correct in time. And with its earliest in-service date appearing to be at least 10 years out, time is one thing an Alaska gas pipeline project has on its side. The U.S. Department of Energy’s Energy Information Administration is showing Alaska North Slope gas coming into Lower 48 markets in about 2020; Kelly said Wood Mackenzie is showing 2021.
Frank said the role of BP Energy in the Alaska gas pipeline would be as a shipper. BP Energy will be looking for the project that “represents the least risk, the best value and the highest netback to BP production on the slope.”
But he’s not concerned about the ability of the North American market to absorb Alaska gas. The “U.S. market is the largest market in the world — so that’s underlying — it will always be there,” he said.
“Right now we’re seeing incredible weakness in demand and that’s having an impact on price,” but commodities are cyclical and while “I can’t remember in my career ever seeing the dramatic decline that we’ve seen in demand and prices as we’ve seen over the last six months,” that just “underscores the risk around price, which is the key variable for anybody who is looking at underpinning” such a huge project.
“But the U.S. economy will respond and ... the underlying demand will always be there,” Frank said.
North American market Frank said the North American natural gas market, “which is the largest market, the most liquid market, the most transparent market, the market with more storage than anywhere else in the world — that market is going through a rather dramatic change.”
The cost of the Alaska gas project was estimated at $20 billion to Chicago in 2001, he said, with a tariff to Chicago of “roughly $2.40 for about a ... 4 billion cubic-feet-a-day pipeline,” compared to estimates today of $30 billion to $40 billion, “and therefore the tariff (to Chicago) is approaching $5 at the upper end of that range,” more than the current price of natural gas.
That highlights the commodity risk, he said, a risk carried by the shippers and a risk that would ultimately be reflected in the netback to the producers on the North Slope.
What’s happening in the North American natural gas market today is “massive demand destruction” due to what’s happening in financial and credit markets and the current economic recession, he said.
Added to that is what happened to gas supplies in 2008 with development of shale gas in the Lower 48. “We have seen shale gas supply increase by about 2 to 3 bcf a day year-on-year,” he said. That caught the market by surprise in mid-2008, “and turned what was a very bullish market in the first half of the year into a very bearish market.”
Then there is the existence in the United States of 12 billion to 13 billion cubic feet per day of regasification capacity, most of which did not exist five years ago. While only about 1 bcf of that capacity is in use today, “there is enormous potential for LNG to come into the U.S. market, up to 12-13 bcf a day. And that’s equivalent to roughly three Alaska gas pipeline projects,” Frank said.
Gas drilling down The supply-side response to the drop in demand has been a reduction in drilling.
Frank said rigs drilling for natural gas peaked at some 1,600 midyear and have now dropped to about 1,200, “so you’ve seen about 25 percent of the rigs laid down in the last six months.”
Natural gas inventories, which are normally drawn down during the winter months due to heating demand, have not been; because of the demand decrease inventory usage this winter is dropping.
“And again, that’s attributable to weak demand and relatively strong supply.”
The natural gas market is also less liquid because of the financial crisis and the economic recession, and “liquidity, the ability to trade in the forward years and into the future is reduced.”
Alaska gas prospects Frank said that the current supply and demand for an Alaska gas pipeline is “not a pretty story right now in terms of North American gas markets, and the signals are very bearish and the demand destruction that we’re seeing and growth of supply in the face of demand destruction is certainly suggesting that we will see weaker prices here in the short- to medium-term.”
But Frank said he is “a big believer in the market,” and the balance of supply and demand: “Low prices will send signals to suppliers to develop less and they’ll send signals to consumers to consume more.”
And the Alaska gas pipeline is at least 10 years out. We don’t know what gas prices will be 10 years from now, he said, noting that 10 years ago they were $2, have since peaked at rates approaching $15 and “the futures market is telling us that gas prices over the next five to six years” will be in the $6 to $8 range.
Among the risks of an Alaska gas project is that Alaska gas “will have to compete at the margins with unconventional supplies” including shale gas and the potential for LNG imports considerably above today’s rates.
Frank said BP Energy, as a potential shipper on an Alaska gas pipeline, is focused on “reducing risk and increasing certainty” and believes that “stakeholder alignment is critical for the project to go forward.”
Frank was involved in the first attempt to move Alaska North Slope gas in the 1980s and said in one way or another he’s been involved in the project for 25 years and to him the “outstanding issue is stakeholder alignment and without it it’s difficult to visualize this project going forward.”
Role of gas shifting Wood Mackenzie’s Ed Kelly said he thinks the long-term position of natural gas in the energy marketplace is “shifting under our feet, really, right now,” and expects demand for natural gas to grow more slowly than was once expected.
Kelly’s presentation was entitled “demand deferred — long-term implications of economic recession on North American energy markets,” and he said power-generation load growth plateaued at about 18 billion to 19 billion cubic feet, but the next plateau in natural gas use hasn’t been reached “and we’re probably going to take a couple of steps back as far as the use of natural gas ... before we take a step forward.”
A few coal plants are being completed and power use is down due to the weak economy.
And as the use of renewable sources of energy grows, “renewables are actually going to impact the level of gas,” he said, absorbing some of the share that was assumed to belong to natural gas.
What will happen when we come out of the recession? Gross domestic product growth rates in the United States have dropped from 2.9 percent in 2006 to 1.4 percent in 2008 and are expected to go negative, a minus 1.7 percent this year, before edging up in 2010 to 0.8 percent, 1.8 percent in 2011 and 2.5 percent in 2012.
“When and if we come out of this phase ... and normal economic growth rates do resume at some point and we get growth again ... let’s say 2010, 2011 and things return to a more or less normal cycle of economic growth and investment, what then?” Kelly asked.
It will take longer than that for natural gas demand to pick back up.
Demand will pick up
While there have been reductions in natural gas drilling, Kelly said those reductions are in areas other than shale. Drilling in shales may not ramp up as quickly, he said, but shales are lower-cost to develop than other areas, so the 30 percent reduction in drilling expected in 2009 will be “from less productive areas into lower-cost and more productive areas such as the shales.”
Shale production declines very quickly but has a long tail, so there is an extended plateau for unconventional Lower 48 production into 2018-19, he said, and “that’s when demand is expected to pick up for natural gas.”
Kelly said there will be a collision of an expected supply plateau “with demand growth resuming or accelerating for natural gas,” assuming the economy grows at normal rates.
While natural gas isn’t expected to be produced at potential rates until 2016-17, that is about when demand “might resume growing at a quick rate, about when LNG might not be so available on the world market ... (and) about then we start to need gas in a more significant way.”
2018-19 is going to be about what 2012-13 was expected to be, he said, with power demand growing and the U.S. forced “to bid into oil-linked world markets for marginal supply at about the time we might wish we had marginal supplies.”
There will come “a time at which the natural gas market grows again,” Kelly said.
“But I’ll tell you one thing: It doesn’t grow as fast as it could have grown. Those renewables do make inroads.”
While the place of natural gas in the long-term energy market in North America is more uncertain than a few years ago, in 2017-18 the U.S. “begins to need to bid into world markets, and whose world markets are oil-linked.”
By 2017, Kelly said, competition for renewed growth in the natural gas market will be between marginal domestic supplies, imported LNG and “potentially frontier supplies” such as Alaska North Slope gas.
| 