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Tussing doubtful that Lower 48 needs North Slope gas Economist questions gas price forecasts, notes recent steep price drop; says there is a lot of Canadian gas between Alaska and U.S. markets Kristen Nelson PNA Editor-in-Chief
Recent prices for natural gas have gotten people thinking “it’s finally come… finally we’ve got the $3 to the $5 (a thousand cubic feet) that’s necessary to commercialize Alaska’s gas. It’s a cinch.
“I’ve seen this before a couple of times,” economist Arlon Tussing told the Anchorage chapter of the International Association of Energy Economics June 15, “but it’s just remarkable how quickly the consensus emerged and how much weight it carries among those who have been wishing.”
Why shouldn’t people think it’s finally come?
One reason is all that natural gas in Canada that Alaska gas has got to get past. And, Tussing said, there is more on the way, with Canadian drilling and completion rates way up over last year.
Another reason is the steep crash in natural gas prices in the last two months.
Then there are natural gas price forecasts — showing prices rising.
Tussing disagrees with those forecasts. Forecasts too monotonic The Energy Information Administration is a good example of such forecasts, he said.
“No year’s forecast on the part of the EIA has had any resemblance — very few of them have been in the same direction — as the following prices.”
Since a national market-driven gas price developed in the 1980s, prices have been too volatile and forecasts too monotonic. “The forecasting operation is in a sense a search for a crayon,” Tussing said.
Forecast lines have tended to be straight lines showing price increases with a kink or two, while for “the last 20-some odd years the observed world has shown no trend.” If you look at observed data, he said, there is no “intellectually respectable way of fitting a curve… there’s not any significant trend for anymore than three or four years running” whether you use annual data, monthly averages or daily averaged.
“So one of the characteristics of the world to be observed is its volatility.” Depletion a forecasting factor And, he said, forecasting virtually always includes “the assumption that there is a long-term driven by depletion. That there is only so much there, that you find the easiest first, the cheapest first, and that over time it got harder to find and the cost goes up. …
“That may be true in some sense, but no sense that has ever mattered so far.” In fact, he said, since a competitive market-driven gas economy developed in the United States in the mid-1980s, “we’ve managed to increase our North American consumption 4 percent a year and maintain prices at a level fluctuating between $1.75 and $2.50 for most of the time.”
This U.S. competitive market-driven gas economy is less than 20 years old. There’s been a gas industry for 200 years, but that was synthetic gas produced by “cooking” coal — or organic matter like corncobs — to provide gas for lighting.
“Natural gas was principally a nuisance encountered in basements and in the exploration for oil,” Tussing said. Only in the 1920s did welded steel pipe become available so that natural gas could be moved long distances economically. Over the next period, through World War II, the old coal and oil-fired gasworks were replaced by natural gas. Inventory of gas early on From about 1945 to the 1970s, U.S. gas consumption was increasing at roughly 10 percent a year, and “that supply was drawn from the inventory of associated gas produced as a by-product of oil production or the non-associated gas in the Midcontinent region … which had been shut-in,” Tussing said.
Most of the gas was priced for the life of the resource at pennies per thousand cubic feet, essentially “given away by the oil companies as long as they could receive enough for it to pay for the well completions.”
In the 1950s, the Federal Power Commission used a cost of production pricing basis in regulating natural gas prices, “and we got virtually our entire gas supply locked into the … price of the throw-away gas that the oil companies had found and didn’t really have any use for.”
As a result, the reserve to production ration fell from about 35 in 1945 to about 20 in the mid-1960s. There was, Tussing said, no reduction in the amount of new gas reserves added, but the addition by development, extension and workover at old fields “dropped to just about nothing.”
In the 1970s, when oil prices rose and people wanted to move to gas — a move encouraged by air quality standards — there was an apparent shortage of gas. Only regional markets Part of the problem was the lack of a national pipeline system to move gas, so there were shortages in some states while at the same time the gas was being used to make ammonia and urea in other states. Through 1985, Tussing said, there was a fear in “virtually all the gas distribution industry and half the producers that we were facing terminal exhaustion of the resource.” Congress limited the use of natural gas for electrical generators, industrial boilers and materials processing. Canada curtailed exports to the United States “in the fear that we would suck their resource dry.”
At the same time, there was “the frenzy for producing the most expensive gas you could invent.” Pipelines or gas companies were prohibited from paying $2 a million Btu for conventional gas, but ceilings were removed for gas from deep formations and the Alaska gas pipeline was approved.
In today’s dollars, Tussing said, gas from an Alaska pipeline would have been about $25 a million Btu — there “was a massive subsidy to anything other than cheap conventional gas.” When the natural gas price collapsed in the early 1980s, almost all of the supplemental gas projects — including the Alaska gas pipeline — collapsed. National market developing In 1985 the country started to see a national market and the nation’s pipeline system became a network. With a competitive market-driven gas economy, growth in gas use has been about 4 percent a year and prices between $1.75 and $2.50 for most of that time.
U.S. gas usage peaked in 1972 at a little more than 22 trillion cubic feet and only recently again reached that level, but, Tussing said, since 1983 “there hasn’t been a year in which the cost of adding new reserves hasn’t declined.”
There is now a single market east of the Rockies and 95 percent of the time the Henry Hub price is within 5 cents of the prices at major sales points. West of the Rockies it’s not a single market — but Tussing we’re still a long ways from the Balkanized markets of 1980, when gas prices were removed from the influence of supply and demand and ranged from 10 cents to $10 a million Btu based on the vintage of the contracts and various regulatory provisions.
Tussing said the current California situation is driven by unfilled demand. He said he hasn’t seen anybody look at the way Alaska gas would link into that, but said he would expect an increase in volatility in the western side of the country’s gas market because that’s where the new capacity would be added more easily.
Just looking at California, he said, “over half of theoretical deficiency in California is already under construction and there is three times as much in addition where they’re under contract.”
“Based on experience,” Tussing said, “we’re in for probably — or at the beginning of — another downward cycle” in natural gas prices.
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