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Washington in crisis mode Greenspan: Tight supplies could weaken industries; expect $7.50 gas Gary Park Petroleum News Calgary Correspondent
With U.S. natural gas supplies at levels so low they may not be able to meet demand during a summer heat wave, and no prospect of a sudden turnaround in domestic production, the alarm bells are sounding in Washington.
For those who missed his initial warning in late May, Federal Reserve Chairman Alan Greenspan said June 10 that the United States is “not apt to return to earlier periods of relative abundance and low prices any time soon,” adding that market signals point to wholesale gas prices greater than $7.50 per thousand cubic feet by next January.
He told the House Energy and Commerce Committee that high prices stemming from the supply-demand crunch have “put significant segments of the North American gas-using industry in a weakened competitive position” against their global competitors.
“Unless this competitive weakness is addressed, new investment in these technologies will flag,” Greenspan said, without going as far as suggesting economic recovery could be undermined.
He called for expansion of liquefied natural gas imports, allowing the United States to use world gas supplies as a “safety valve” should North American production become too tight.
Abraham: only limited opportunities to increase supply Energy Secretary Spencer Abraham, in a letter to 30 senators released June 9, said that “conservation, energy efficiency and fuel switching” will be crucial to satisfy demand in the next 12 to 18 months. He said “there are only limited opportunities to increase supply.”
Abraham has called a June 26 emergency meeting of his privately funded advisory group, the National Petroleum Council, to deal with the shortage and head off dangers that gas could top last winter’s spike of $12 per million British thermal units.
“The challenge requires us to act today,” he said June 4, noting that gas in storage dropped to 623 billion cubic feet in early April, raising fears that it could enter winter at a record low of 2.6 trillion cubic feet, or the equivalent of what was burned last winter.
The Energy Information Administration estimated gas in storage at 1.2 trillion cubic feet as of May 30, up 114 billion cubic feet in a week, but still 755 billion cubic feet or 39 percent below the levels of a year ago and 484 billion cubic feet or 29 percent below the five-year average.
Carl English, president of Consumers Energy, a subsidiary of CMS Energy, told the House committee June 10 that significant actions must be taken or gas markets will “remain tumultuous and the 64 million homes and business in our country using natural gas will suffer the consequences.”
Chronic gap between supply and demand Anadarko Petroleum Vice President Richard Sharples told the committee a chronic gap between supply and demand should be closed by lifting regulatory barriers to exploration and development, especially on federal lands.
Hal Kvisle, chief executive officer of Calgary-based TransCanada, testified before the committee that his company expects North American demand to outstrip supply from traditional sources over the next several years.
“We believe gas from Canada’s North and from Alaska, as well as liquefied natural gas, are all required in the next decade if North America is to have competitive gas prices,” he said.
“We estimate natural gas demand growth of more than 15 billion cubic feet per day by 2012, but supply growth from North American sources is not expected to be more than 5 billion cubic feet per day.”
Kvisle insisted gas from the Canada’s Mackenzie Delta and Prudhoe Bay are essential components of the demand puzzle.
Devon Canada believes Delta gas will be economic at sustained New York Mercantile Exchange prices of $3.50 per million British thermal units.
Equally, the Mackenzie Delta Explorers Group, including Devon, Petro-Canada, Anadarko Canada, Burlington Resources Canada Energy, BP Canada Energy and Chevron Canada Resources, rates the Delta potential as much greater than the existing 6 trillion cubic feet.
Gas: the other energy crisis A broad-based coalition of U.S. industries, including steel and petrochemicals, has described gas as the “other energy crisis” because it attracts less attention than oil.
In calling for a response from the Bush administration, Greg Lebedev, president of the American Chemistry Council, representing the largest industrial consumers of gas, said “no company, no industry, no consumer can absorb a threefold increase in major raw material prices and continue to compete in the global marketplace.”
A survey by UBS Warburg released June 9 has responded to the grim prospects by raising its average price projections through 2004 to $4.15 per million British thermal units from $3.65 — its highest forecast on record.
Prices on the New York Mercantile Exchange have been around $6.30 this week, with observers braced for signs of a heat wave that would boost the consumption of gas-fired electricity. Possible solutions The possible solutions being debated include:
• Dropping summer restrictions on emissions by switching industrial and power plant consumption from gas to oil or coal, despite environmental objections.
• Government low-cost loans or loan guarantees to utilities and merchant energy traders to help them build gas inventories.
• Creating through the federal or state governments a gas equivalent of the Strategic Petroleum Reserve, selling the gas to local distribution companies as they fall short of supplies during winter.
• Lifting restrictions that prevent access by drillers the gas found on federal land in the Rocky Mountains and Gulf of Mexico. The Natural Gas Supply Association estimates that resource at 225 trillion cubic feet of potential reserves, although the Interior Department argues two-thirds of 59 million acres of federally owned lands in Colorado, Utah, Wyoming, Montana and New Mexico are available for drilling.
• Royalty relief and tax incentives such as accelerated depreciation to encourage activity by producers. LNG lacks infrastructure Any talk of quickly stepping up the pace of LNG imports is inhibited by a lack of infrastructure and stern environmental opposition to offshore facilities.
Regardless of proposals to increase U.S. import terminals to 22 from four, plus four more for Mexico’s Baja California, Lehman Brothers analyst Thomas Driscoll sees LNG making only steady gains from 1 percent of U.S. domestic supply currently to 5 percent in 2006 and 10 percent in 2010 over a period when U.S. consumption is forecast to grow from 22 trillion cubic feet a year to well over 30 trillion.
The harsher alternatives, while longer-term answers are developed, could extend to demand destruction, or closing off deliveries to gas-dependent heavy industries, such as the petrochemical sector.
Output from U.S. fields dropped by 3 percent to 5 percent last year and is not likely to recover this year with conventional E&P companies keeping a tight hold on their exploration budgets. Little hope for more Canadian gas Although the pace of drilling has quickened in Canada, there is little hope that Canadian sources can raise their share of the U.S. market above 15 percent.
UBS confirms other warnings that the aging Western Canada Sedimentary Basin, which ships 60 percent of its production to the United States, needs 11,800 wells this year — 500 more than the latest forecasts — just to hold the line on output.
The UBS report said Canada’s total production fell 5.2 percent in May from a year earlier and has dropped by 3.5 percent this year over the same period of 2002. FirstEnergy Capital expects Western Canada Sedimentary Basin production to decline by 5 percent to 6 percent this year or 1 billion cubic feet per day.
However, not everyone is ready to sign off on the Western Canada Sedimentary Basin. Shell Canada executive Larry Marks told a petrochemical conference June 9 the basin will remain in the forefront in Canada and “will continue for a number of years before the frontiers catch up.”
He said Shell Canada, based on the plays it is pursuing, is certain estimates of Western Canada Sedimentary Basin potential reserves are “too conservative.”
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