High prices, lean supplies fuel Washington summit.

Weeks before summer's real heat arrived in Washington, natural gas policymakers and organizations brought their concerns into the open about natural gas price impacts from increasing demand amid dwindling production. The Natural Gas Supply Association and Canadian Association of Petroleum Producers kicked off an unusually busy June for gas in the nation's capital with a briefing about supplies and producer responses and challenges. The American Gas Association's (AGA) supply task force discussed price implications for local distribution companies and their customers when it met two weeks later. The events culminated when the National Petroleum Council (NPC) convened a natural gas summit later in the month as summer's first heat wave landed.

Upstream and downstream gas organizations considered the problem so serious they didn't hesitate to use a once-dreaded phrase - demand destruction - to describe one consequence of substantially higher US gas prices. The change was particularly striking among utilities, which previously emphasized supply reliability. "Our members have moved from concern to outright worry," an AGA spokeswoman told Hart's E&P.

Natural gas provides 25% of the energy that powers the $10.5 trillion US economy, noted Dr. Daniel Yergin, chairman of Cambridge Energy Research Associates. The overall economy will feel the impact of higher prices, affecting any recovery from the current downturn, he said in remarks at the gas summit. "What we're seeing today is not a failure of markets but, rather, shortfalls of geology and production and limitations from restrictions," Yergin said.

Henry Hub natural gas spot prices averaged well above $5/MMBtu through the end of May and were more than $6/MMBtu in the first week of June, said the Energy Information Administration in its short-term energy outlook for that month. Assuming normal weather, it predicted spot gas prices between $5.50 and $6/MMBtu for the rest of 2003. EIA blamed the higher gas prices primarily on low underground inventories (1,438 Bcf as of June 15, compared to the 3 Tcf goal for the beginning of each winter heating season) as above-normal injection demands competed with industrial and power generation demand.

Producers essentially agreed. They also expected to be challenged simply to meet existing demand. "We're running as fast as we can just to meet it," NGSA President R. Skip Horvath said. Some 674 Tcf of resources exist in the United States and Canada, but access is difficult and the gas will be more expensive to produce, he continued during the NGSA-CAPP briefing.

Horvath expected gas storage to be filled by the beginning of heating season, but at rates limited by mechanical capacity and state utility commissions' regulations. He also anticipates that significant new supplies will be needed to offset rising decline rates. "We need to find a new Texas each year to replace our production. That's why land access restrictions are such a problem," he said.

Easy choices

Producers made similar points during the NPC gas summit. "The problem was a long time in the making," said J. Larry Nichols, chairman and chief executive officer of Devon Energy Corp. in Oklahoma City, Okla. "If you encourage demand and discourage supply, sooner or later you run into problems. It's been easy for politicians during the past decade to satisfy environmentalists by restricting exploration and promoting natural gas as the most desirable fuel."

He said the United States is the only country in the world that bans drilling in most of its offshore areas. Every other nation with offshore acreage encourages it and creates jobs as a result, according to Nichols. Significant obstacles to more domestic gas exploration and development also exist onshore, he said. "A substantial amount of our acreage is either off-limits or so restricted that it makes no sense to drill," Nichols said.

Exploration and production companies have responded quickly to higher gas prices, observed Diemer True, chairman of the Independent Petroleum Association of America and a partner in True Companies Inc. in Casper, Wyo. By the time the NPC convened its gas summit, 30% more rigs were drilling for gas in the United States than at the beginning of the year, he indicated. "In April of this year, True Drilling had no rigs running. Today, it has six," he said.

True maintained that the Rocky Mountains represent the best new US gas resource opportunity, with approximately 25 Tcf awaiting development in the Jonah field, in tight sands and from Powder River Basin coal seams as coalbed methane. "Our experience is that if we can produce it, the pipelines will come in and take it away," he said.

LNG's role

Among several summit participants, liquefied natural gas seemed to be a more likely mid-term solution to higher gas prices than constructing pipelines from Alaska's North Slope and Canada's Mackenzie River Delta or easing access restrictions in the Lower 48 states. Yergin pointed out that higher gas prices have improved LNG's economics and made it a more attractive North American supply option. "The transition to a new global gas market has begun," CERA's chairman said.

"LNG is something not to fear, but support," declared Federal Energy Regulatory Commission Chairman Patrick Wood III, adding that its outlook has improved as project developers have built storage. He said operators of existing LNG terminals have applied to increase their current import capacity from the current 1 Bcf/d day to 4 Bcf/d in another year, while planned projects could boost capacity to 13 Bcf/d by 2009.
"Today, 1.5 to 2 Bcf/d of gas comes into the United States as LNG. That means that more ships come in during a day now than during a year 5 years ago," observed Richard L. Grant, president and chief executive officer of Tractebel LNG North America LLC in Boston. "LNG has long-term contracts to back up long-term investments worldwide." The Tractebel North America Inc. subsidiary operates the only LNG import facility in Massachusetts.

Meanwhile, Dominion Resources planned to reopen the Cove Point LNG terminal and regasification plant in southern Maryland a few weeks after the gas summit. The installation has been liquefying, storing and processing domestic gas for customers in the US Mid-Atlantic region. Once it's reactivated, the installation will have 5 Bcf of storage capacity and be able to send out 1 Bcf/d of gas into Transcontinental Gas Pipeline, Columbia Gas Transmission and Dominion Transmission's Mid-Atlantic area pipelines.
Future LNG terminals face permitting and infrastructure challenges that are every bit as formidable as the land access advocates and Far North pipeline sponsors must overcome, however. "We consider importing LNG a safety valve for prices, but hardly a long-term solution," US Minerals Management Service Director Johnnie Burton said during the gas summit.

She added that another Interior Department division, the Bureau of Land Management, recently completed a study suggesting that there are 135 Tcf of producible coalbed methane in the Rockies. Burton said methane hydrates are an attractive long-term solution and MMS and Interior are participating in Anadarko Petroleum Corp., Maurer Technology Inc. and Department of Energy's recently announced methane hydrate research project (see p. 63 of the June 2003 Hart's E&P).

Canada supplies

Officials from NGSA and CAPP shared Burton's view that LNG's actual contribution to total demand will be limited when they held their briefing a few weeks earlier. "The reality is, given the market's evolution, there's a limit to how fast LNG can come on. We see it as a necessary incremental supply source," said CAPP Chairman John Dielwart, who also is president of ARC Resources.

Horvath said that NGSA agrees with Federal Reserve Chairman Alan Greenspan that LNG will be needed, but added, "It doesn't compete; it's part - but only part - of a long-term solution." LNG satisfied roughly 1 % of total US gas demand in 2002 and could double its contribution to 2 % this year, he suggested. Horvath also said that EIA expects LNG's contribution to reach 5% eventually, "but that's far from dominant."

Dielwart pointed out that Canada's 3.8 Tcf of natural gas exports annually to the United States make it the largest foreign supplier, proving 16% of total US consumption. He indicated that 11,000 of the anticipated 17,000 wells that will be drilled in Canada during 2003 will be for gas - essentially from existing prospects. "There are plenty of resources. The whole issue is converting them into reserves. Higher prices will be needed," the CAPP official said.

General sentiment at the gas summit was that all options should be considered. "We hope that the current tight supply situation doesn't make us lose sight of natural gas as an energy source. There's more than 60 years of supply worldwide," said V.W. Holt, vice president of onshore US operations at BP America Production Inc. "We need to be in action on virtually every front - promoting development, conservation, efficiency and fuel switching."