|
Fed boss fires up debate Greenspan warns of gas supply crisis; Abraham wants immediate action Gary Park Petroleum News Calgary Correspondent
Now that Federal Reserve Chairman Alan Greenspan has weighed in, it’s as good as official – North American gas supplies are facing a bind. Giving the highest profile yet to supply shortfalls, he told a congressional committee on May 21 that he was “quite surprised at how little attention the natural gas problem has been getting, because it is a very serious problem.”
With demand rising even during an economic downturn and competition intensifying between utilities and storage operators for limited inventories, Greenspan said “something has got to give and what is giving ... is price.”
Partly in response to his warning, future prices promptly climbed above $6 per thousand cubic feet, heightening fears among government and industry leaders that an exceptionally hot summer will be a further drain on storage levels which are already 42 percent below the five-year average and at their lowest point since they were first tracked in 1976.
“Working gas in storage is presently at extremely low levels and the normal seasonal rebuilding of these inventories seems to be behind schedule,” Greenspan said.
U.S. Energy Secretary Spencer Abraham had already waved his own warning flag on May 16 when he asked the National Petroleum Council, his department’s advisory body, to hold an emergency meeting in June and develop recommendations that can be acted on this summer. The council was requested last year to prepare a detailed report by this fall on supply, demand and technologies that could influence the U.S. gas outlook over the short and long-term.
But Abraham said he can longer wait until mid-September for that assessment. LNG, Arctic gas on June agenda Items to be dealt with in that report include: A detailed analysis of factors bearing on supply and demand, with a heavy emphasis on North American supply and production; prospects for liquefied natural gas imports and Arctic gas development; access to federal lands; changes to regulatory and environmental rules; demand outlook in the power-generating sector; the potential for fuel switching; and a review of storage and distribution infrastructure.
Abraham said the June meeting would open the way for the Department of Energy and other federal agencies to move immediately on easing “short-term supply constraints.”
He said that if storage is to be raised from its current 1 trillion cubic feet to between 3 trillion and 3.5 trillion cubic feet by the start of the new contract year in November, injections must rise above the usual weekly average of 60 billion cubic feet.
Like Greenspan, Abraham expressed concern about depletion rates and reduced drilling that could see supply fall by 2 percent this year. No certainty Canada can sustain exports At the same time, Canada, which accounts for 94 percent of U.S. imports or 16 percent of U.S. consumption, is struggling with rising costs that are a barrier to offsetting production declines in the Western Canada Sedimentary Basin.
In a report earlier this year, Lehman Brothers analysts Thomas Driscoll and Philip Skolnick said production from Canada’s anchor supply source was down almost 1 percent in 2002 and would have been off by 2.5 percent if the calculations had excluded British Columbia’s Ladyfern field which is rapidly being drained.
With exploration of Canada’s East Coast offshore littered with dusters, the Mackenzie Delta more than five years from start-up and initial productivity from Western Canada Sedimentary Basin wells almost 45 percent below 1995 levels, there is no certainty that Canada can sustain exports at last year’s volumes of 3.845 trillion cubic feet.
Restrictions in Rocky Mountain area blocking development The U.S. Natural Gas Supply Association and the Independent Petroleum Association of America have both pointed out this year that federal land access restrictions in the Rocky Mountain area are blocking development of a prolific area that has potential reserves of 137 trillion cubic feet and could provide an incremental 5.5 trillion cubic feet a year over 15 years.
But Abraham would not answer questions on whether the Bush administration might bow to pressure and open up a new production center. IPAA chairman Diemer True told a congressional committee in April that producers face a dual challenge – maintaining existing supply levels and boosting supplies to meet new demands.
He said “government regulation, bureaucracy and delay” are all a threat in varying degrees to the Rockies, Gulf of Mexico and both east and west coast offshores.
IPAA wants royalty, regulatory reform True urged Congress to promote domestic output by reforming onshore and offshore royalties, streamlining regulatory approvals, offering royalty incentives for marginal wells and providing federal funding for regulatory oversight agencies.
Analysts have also observed that the fall-out from the Enron scandal and California power crisis have battered the credit ratings of leading gas buyers which are no longer able to contract long-term gas.
The knock-on effect is that the U.S. is dominated by a short-term market which undermines strategic investment, while independent E&P companies can’t get financing for exploration.
Meantime, a Coalition for Energy Market Integrity and Transparency is working with the Federal Energy Regulatory Commission on a plan for mandatory price reporting to end market manipulation.
But the challenge is formidable. In March, of the 37 price-reporting points in the United State that provide data for FERC, 36 had insufficient information. Technology: a double-edged sword As the industry runs faster just to stay even with depletion rates, technology is likely to receive greater attention.
In that respect, Greenspan identified a two-edged sword: Technology has doubled the success rate of exploration, but it has also emptied our reservoirs at a faster rate.
Matthew Simmons, chairman and chief executive officer of Houston-based energy banking firm Simmons & Co. International, explained that problem at the Offshore Technology Conference in Houston in May.
He said the technology explosion of the 1990s has allowed multiple zones to be produced simultaneously and rapidly, creating a “treadmill that now rises exponentially.” New discoveries are being depleted by 50 percent in their first year of production.
Simmons said advances have been made in drilling deeper wells, deepwater exploration and production, subsea systems, horizontal wells, three-dimensional seismic and advance drilling systems, while fiber optics, wireless and software applications are among the technologies which have been adapted for use by the petroleum industry.
But he cautioned that the gains by service firms have not been properly rewarded by producers who maintain an ambivalent attitude towards their suppliers.
The only hope may be for the DOE to increase research funding, or “we won’t have a rosy energy future.”
| 