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Cambridge Energy sees deepwater, Lower 48, Canadian competition for Alaska gas A couple of years expected to show volumes available from more gas exploration in these areas; coal also competition if price stays in $3-$4 range Kristen Nelson PNA Editor-in-Chief
The Lower 48 natural gas shortage which has driven prices up — and to which Alaska gas could be one of the long-term solutions — was visible on the horizon in the late 1990s.
Ed Kelly, Cambridge Energy Research Associates’ director of North American natural gas research, told The Alaska Support Industry Alliance “Meet Alaska” conference Jan. 26, that what could be seen looming on the horizon several years ago was a combination of declining natural gas production from the shallow water shelf and the beginning of construction of gas-powered power generation plants.
“We could see some form of exposure to (natural gas) shortage… In our scenario analysis we began to develop it about three and a half years ago, because you could see a decline on the shallow water shelf … and you could also see that actual construction of gas-powered generation plants was beginning. … What you could also see was that it was masked by warm winters.”
Then in the winter of 1999-2000, “beginning in January … a whole lot of gas came out of storage in a month in which weather didn’t really justify it,” with the Energy Information Administration recording record single-month withdrawals.
The weather didn’t explain the withdrawals, Kelly said. Supply did.
What was going on in January of 2000 “was that supply wasn’t really showing up at the wellhead at that point.” By spring the problem became one of meeting summer demands while getting enough gas back into storage to meet the demands of the winter of 2000-2001. What really kicked the price up The price of natural gas increased by about a dollar, he said, rising above that of residual fuel oil, where it stayed to get incremental demand off the market so that enough natural gas would go into storage.
“So going into this winter we were maybe prepared. We were maybe prepared for a historically normal winter.” Actually supplies were dicey if this winter had fallen within the recent 15-year average, which included 10 warm winters of the late 1980s and 1990s, he said.
But this winter in the Lower 48 began according to 30-year averages, with November and December the coldest in the Lower 48 in 106 years, “adding some 10 billion cubic feet per day of demand in the market above normals on average, so therefore taking 600 billion cubic feet out of the gas market.”
The problem then became “to prepare for the proverbial late-March cold day that it is the utility’s basic function to prepare for.” For that to happen, the price of natural gas had to go up again — and it did. From a point between the residual fuel oil price and the home heating oil price, “gas went above most liquid forms.
“And,” Kelly said, “needs to stay there for a little while to take that increment demand off the market.” Which means you can’t supply your customers who have come to rely on “cheap, plentiful, environmentally friendly natural gas.” Assumption gas would be plentiful, cheap There has been a default toward natural gas in power generation because there has been an assumption that natural gas would always be plentiful at a low cost, Kelly said. Alternatives to gas for bulk power generation — nuclear, coal, hydroelectric — have been eliminated.
“Therefore, when the economy keeps growing and the power market begins to show volatility that attracts generation development, over 95 percent of the now more than 300,000 megawatts of new proposed projects in the U.S. are gas-fired. And they’re beginning actually to get built. And that’s an issue as far as supply goes,” he said.
Natural gas for power generation varied from 7 billion cubic feet a day to 11-12 BCF in the early 1990s, but for 2001, Kelly said, “we expect that demand for power generation alone to vary from 11-12 billion cubic feet per day to close to 25 billion cubic feet per day,” making it difficult to both store gas needed for winter and supply summer power generation needs.
If the remainder of the winter is warm, he said, we will hit the previous record low in storage inventory. “If it’s anything colder than that, then we go into uncharted territory by varying depths. The colder the winter, the more into uncharted territory.”
In terms of prices, Kelly said, this means that gas needs to stay priced above the nearest clean liquid competitor until winter supply is met.
At present levels of use, 1 billion to 1.5 billion cubic feet a day are going to be added to natural gas supply needs, at growth in the 2-3 percent range. That, he said, is in addition to the need to recovery storage inventories, which means the price must stay up to allow storage and supply growth to occur. When price recovery might occur “So right now, we’re at an unhappy confluence of the power generation market is becoming real, we’ve had a cold winter and we’re sitting on a 10 to 15 year supply level as far as available production from the U.S. Lower 48 goes,” Kelly said.
Within the next couple of years we will know what it means to have 1,100 rigs active — with more of them than in the past drilling for natural gas.
“Our estimate is that we will see an increase in U.S. gas production by about a half a BCF a day to a BCF a day, 2001 over 2000, and that that increase will continue,” he said.
And some information will be available much sooner: “The production that we see six months from now will go a long way to determining what we can do with the current rig availability in the U.S. Lower 48 market,” Kelly said.
The second thing that will be known within the next couple of years will be the pace of gas discoveries in the deepwater Gulf of Mexico, discoveries which will determine what can come into the market beginning in 2007.
“That’s an important number. We think the range of uncertainty in the year 2010 in production from the Gulf of Mexico is about 10 BCF per day,” Kelly said.
Another important thing for the U.S. market is Canadian production. For Canadian exports to the Lower 48 to increase substantially, “a higher level of deep drilling activity” is required. And there aren’t enough rigs in Western Canada capable of drilling for deep gas, he said.
But the potential is there, Kelly said, and increases in production from Canada would have a bearing on value and netback of Alaska gas.
Once gas gets to Alberta, pipelines exist to take it to the West Coast, the Midwest and the Northeast.
“There’s about 2 billion cubic feet per day of easy expansion,” Kelly said, and Cambridge expects Western Canada to take care of that amount of cheap expandability in the next few years.
“So by the time Alaskan gas comes on… there will probably need to be some sort of build further … from Alberta,” he said. It’s a difficult transition Kelly said this is “a difficult transition” rather than “an enduring crisis.”
Although 2001 looks tough.
“The 2001 challenge is to get enough gas back into storage for next winter. That’s going to be tough to do. So gas needs to price above a lot of liquid fuels for that to happen.”
Once enough gas gets back into storage, however, Kelly said Cambridge expects a price softening to the $3 to $4 range by 2002.
Part of that would come from a return to normal winter.
At a $3 to $4 price range, “gas would continue to be a competitive viable fuel for power generation.” In the $3 to $4 range you are just at the point where new coal power generation becomes marginally acceptable and will also cause supply growth, which Cambridge thinks will happen both from Alaska and other sources.
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