|
U.S. industrial gas demand headed for sharp drop Researchers say declining industrial consumption to be offset by rising use of gas for power generation, but don’t expect a drag on prices over next three years Gary Park PNA Canadian Correspondent
Industrial demand for natural gas could drop by 2.8 billion cubic feet per day over the next three years and moderating crude oil prices could trigger fuel switching that reduces demand by another 1.1 billion cubic feet per day, says a research report by Virginia-based Friedman Billings Ramsey.
But the combined drop will not be enough to send gas prices into a tailspin like that of the 1990s because of several factors: a U.S. economic recovery, greater consumption of gas for power generation and environmental regulations that promote gas consumption over that of more polluting alternatives.
The report is based on Gross Domestic Production growth assumptions of 1 percent a year for 2003, 2004 and 2005 that will actually boost demand over the period by 2.3 billion cubic feet per day.
The biggest gain, said FBR, will be 2.4 billion cubic feet per day for electrical generation, followed by 1.5 billion cubic feet from the imposition of new nitrous oxide emissions standards this year and in 2004.
On the supply side, the base Lower 48 supply is projected to shrink by 1.3 billion cubic feet per day, while imports from Canada are forecast to decrease by 500 million cubic feet per day.
But liquefied natural gas is expected to climb by 1 billion cubic feet per day, while U.S. exports to Mexico will fall by a similar amount.
Supplies from drill bit falling short FBR says new supplies of gas from the drill bit are falling short of offsetting the growing decline rates from existing production in the United States and Canada, with Canadian exports to the United States dropping last year for the first time since 1986.
It says Canadian volumes will decline by 300 million cubic feet per day this year and 200 million cubic feet in 2004 before flattening out in 2005, mainly because of lower Canadian production and partly because of lower industrial consumption.
FBR predicts 2003 gas prices will average $4.40 per thousand cubic feet, then ease back to $4 in 2004 and $3.70 in 2005, assuming moderate economic growth, a slump in crude prices to $22 per barrel and “normal” weather.
It says the “current overwhelming supply/demand imbalance” should support its expectation of sustained strength in gas prices.
U.S. industrial demand dropping On the U.S. industrial demand front, FBR says that in addition to the loss of 2 billion cubic feet per day since 2000 another 2.5 billion cubic feet will disappear by the end of 2005 as existing hedges, that provide some price protection, evaporate and chemical plants shut down in North America.
In addition, environmental and security costs will put added burdens on already thin industrial margins in the United States.
But the role of gas in power generation, which has expanded from 14 percent of market share in 1993 to 22 percent today, will account for another 3.1 billion cubic feet per day of consumption over the forecast period.
The report says FBR expects natural gas to “capture a greater share of the power generation market, as significant recent increases in capacity have positioned natural gas as the dominant major supplies of electricity …”
Assessing the Canadian outlook, FBR warns that a combination of lower initial productivity and faster decline rates has set the stage for a “perilous” situation in which last year’s drilling cutback and an absence of world-class discoveries will reduce Canadian gas production volumes this year.
However, a drilling recovery this year should put the brakes on production erosion in 2004, when rising demand from the oil sands and heavy oil fields will boost Canadian industrial demand and lower exports to the United States.
The report says the potential of both the Mackenzie Delta and coalbed methane will not materially affect Canada’s supply in the near term.
FBR believes northern British Columbia and Alberta hold the best odds of yielding “surprises” for Canada’s production. Coalbed methane, Mackenzie may close gap Speakers at a Canadian Institute conference in mid-January cautioned that beyond 2012 the United States may not be able to count on Canada’s conventional gas supplies to make up any supply shortfall.
Bill Langford, director of forecasting with TransCanada PipeLines Ltd., said the best hope for closing the gap lies with Canadian coalbed methane, Mackenzie Delta and possibly North Slope gas and liquefied natural gas to meet a projected annual demand of 23.7 trillion cubic feet in the next decade.
J. David Hughes, a member of the Canadian Gas Potential Committee, said a recent National Energy Board prediction that Canada could have a yearly shortfall of 2.8 trillion cubic feet to 4.9 trillion cubic feet by 2025 underscores how critical coalbed methane and other unconventional gas sources are in the equation.
Langford said TransCanada is believes North American demand will reach 30.5 trillion cubic feet by 2010, propelled by gas-fired power generation, based on average price estimates of US$3.50 per million British thermal units on the New York Mercantile Stock Exchange.
He said TransCanada doubts a Nymex price of $4 is sustainable over the long term.
| 