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Economic conditions shift window for Arctic gas out a year to 2009-10 Recession through 2004 would shift window even farther, possibly to 2015, Ed Small of Cambridge Energy Research tells committee Kristen Nelson PNA Editor-in-Chief
The economy and natural gas prices are down — and that is pushing out the window of opportunity for frontier gas, Ed Small of Cambridge Energy Research Associates told the Legislature’s Joint Committee on Natural Gas Pipelines Nov. 7.
Cambridge Energy expects to see some recovery from the current economic weakness in the mid-part of next year, certainly in the second half, but in the meantime, Small said, there is “quite a strong demand softness” for gas, now and for the first half of 2002.
Asked by committee chair Sen. John Torgerson how Cambridge Energy now feels about the windows it previously saw for frontier gas in 2008 and 2010, Small said:”I think the window of opportunity has shifted in time, probably by a year.”
“And I think that’s a combination of the demand destruction that we’ve seen this year — the recovery from that just shifts the world by a year going forward. You push the demand down, it takes a while to get back up to previous levels before you can go beyond that.”
Cambridge now sees a window in 2009-10, and probably another in 2012 to 2014, he said.
Rep. John Davies asked about the effects of a slower recovery.
“We do have a scenario that calls for a recession that lasts through 2004 and it obviously shows much lower prices, prices that would stop at $3 — between $2.50 and $3 — through the entire period,” Small said.
“What that means in the contest of Arctic gas, obviously, is it pushes that window of opportunity well beyond 2010 and possibly out to ‘15.”
Demand is down Natural gas demand is down in all sectors, Small said, and fuel switching that occurred in the first half of this year will offset some of the return of demand expected in the second half of 2002. Conservation is also a big factor, especially in residential and commercial sectors in the west where local conservation programs and higher prices have had a big impact.
In power generation, where long-term growth in natural gas demand is expected, there is now a question of when that growth will occur: When you push demand down, Small said, it takes longer to get back to the original point and then to start growing again. New gas-fired power generation is coming on in 2002 and 2003, he said, but “if the economy has not recovered, you won’t have those facilities running at capacity.”
There is a similar demand decline in Canada. Small said recovery of demand growth will be slower there, partly because the Canadian economy lags the Lower 48, but also because the demand for power generation in Canada is not growing at the same magnitude as in the United States.
Storage in Lower 48 almost full Small said that natural gas storage is almost at capacity in the Lower 48 and it would take an extremely cold winter to draw that storage down a significant amount, so during 2002 less gas will be required for storage.
“In our estimate it’s roughly 2 billion cubic feet a day less injection required next year to reach the same full level by the end of the injection session,” Small said. The story in Canada is very similar.
Drilling has been impacted by lower natural gas prices in the Lower 48, and Small said Cambridge expects to see reserve additions of only about 400 million cubic feet a day in the Lower 48 for 2001 and declines in 2002 of about 500 million cubic feet a day.
Drilling has been declining for three months, he said, and unless prices get back up to a sustainable $2 level, drilling probably won’t recover until later 2002, especially since the 500 million a day decline is 2002 is more than offset by gas in storage.
In Canada, winter drilling with deep rigs will continue because those rigs were contracted last year on a two-to three-year basis, Small said, and since producers have to pay for the rigs whether they use them or not, odds are they will use them. Much summer drilling in Canada is shallow and “more than economic at today’s prices — we shouldn’t see a big drop there, either,” he said.
Because of the economic slowdown in Canada, pretty well all of the supply growth in natural gas will be going to export markets — the Lower 48. That means that decline in Lower 48 supplies will be more than offset by Canadian growth next year, Small said.
Prices expected to stay at $2.75 through winter Small said that factors affecting the natural gas price this winter are the demand decline, high storage and incremental or increased Canadian export. Cambridge expects, he said, that Henry Hub prices will be around $2.75 through the winter.
There is a typical demand softness in the spring, Cambridge does not expect the economy to have fully recovered by then and injection requirements will be lower, probably pushing spring and early summer prices down to the $2.25 level.
Assuming the economy recovers and with summer power generation demands, prices in the third quarter should get back up to the high $2 level. By the end of next year, in conjunction with economic growth, Cambridge expects the Lower 48 price to get back up to $3, maybe even $3.25, for the 2002-2003 winter season.
That price level, Small said, “should bring back fairly robust drilling activity in 2003.”
In 2002, the Henry Hub price could average $2.71.
Longer term, Small said, “there are drivers there to keep prices from sliding down below $2… there are drivers there to keep prices long-term from being much over $3… what that suggests is longer term, there’s probably a band of prices in the $2.50 to $3.50 range … there is going to be volatility. We are seeing shorter cycles, but the … range we see now… is $2.50 to $3.50…”
LNG greenfield facilities expected Torgerson asked about liquefied natural gas and Small said the four existing LNG facilities in the Lower 48 are coming back on stream, with three now active and the fourth coming back on next year. Cambridge anticipates growth in 2003-2005 and expects to see greenfield LNG facilities built in the second half of the decade.
There are a myriad of proposals for new LNG projects, and like power generation proposals there will probably be at least a 50 percent mortality rate, Small said, “but we do see LNG being an integral part of the new supplies in the Lower 48 in the second half of this decade.”
Torgerson said he views LNG as Alaska gas’s biggest competition.
Small said Cambridge defines frontier gas as Arctic, including Alaska, offshore East Canada and LNG.
“And of those, the two that are now plugged in are LNG imports and growth in the offshore east Canada, the offshore Nova Scotia, Sable Island areas. So we see growth in those areas. The question becomes one of, as you put quite correctly, what are the competitive forces of LNG and how does Arctic gas compete with that and can Arctic gas compete successfully with that.”
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