Gas markets look bright today, a bit dimmer tomorrow

Is it just me, or is it just a bit unseemly that U.S. producers are still clamoring for relief in Washington, D.C., at a time when Nymex crude is hovering near $20/bbl and spot gas prices have topped $2.50/Mcf in the doldrums of summer?

That irrelevant observation aside, while everyone`s breaking out in choruses of "Happy Days Are Here Again," it might be instructive to take a longer view of the natural gas market in the U.S.

Helping to that end is the Gas Research Institute, which has whipped up some new scenarios to follow up on its 1999 baseline projection, released last August. That projection, in a nutshell, called for a persistent low gas price outlook as U.S. natural gas consumption soars to record levels early in the next century as producers are able to meet demand with only modest increases in wellhead prices. That projection assumes that: technology will continue to advance at 50-75% of historical levels; there is an ample undiscovered gas resource base; and producers will continue to reinvest 75% of their cash flow from domestic sales back into U.S. E&P.

With its "afterthought" scenarios outlined a new study, GRI looks at the market outlook if: technology innovations freeze at 1997 levels; the gas resource estimate falls by 15% (250 tcf) or by 30% (500 tcf); producers reinvest less in E&P; producers reinvest less but demand higher returns offshore.

GRI`s baseline sees U.S. gas consumption rising by more than a third, from 21.8 tcf in 1997 to more than 31 tcf in 2015, with the gas market share of the U.S. energy mix climbing to 28% from 24%. GRI also pegs the U.S. Lower 48 resource base at 1,850 tcf, an aggressive claim. It still sees the baseline projection as the most realistic outlook but postulates the extra scenarios stemming from unforeseen events.

The biggest impact of all of these scenarios emanates from the "frozen technology" case, wherein gas supply falls by 41% by 2015, if the baseline price projections hold. Almost 75% of this drop comes in the Lower 48, the rest in imports of Canadian gas. Without the technological progress, gas prices would have to spike by 64% by 2015 to meet expected demand.

Cutting the estimated resource base by 15% and keeping prices flat results in a loss of Lower 48 production of 14% from the baseline, hitting markets by 2010; the 30% decline slashes output by 28%, with markets getting squeezed in the near term. Again, it would take a huge price spike-68%-to revive production enough to meet demand under the more extreme case.

Says GRI: "Lower 48 drilling would increase significantly as high-quality offshore resources were depleted and higher prices stimulated drilling of more shallow offshore and nonconventional wells. Production would shift away from the Gulf of Mexico-production is 1.6 tcf lower by 2015-and toward Canada, which would export an additional 1.6 tcf/year to the United States. The number of wells drilled in 2015 would increase to 54,000, compared with 34,500 in the baseline projection."

Looking at cash flow reinvestment, producers historically have reinvested an average 74% of cash flow back into Lower 48 E&P, notes GRI: "In a depressed business climate, producers might elect to reduce domestic investment or invest overseas, resulting in a decline in funds for exploring, developing, and producing future U.S. supplies." Under both of GRI`s reduced-investment scenarios, Lower 48 output falls by 8-12% as Canadian production suffers relatively less.

Pretty much the same scenario holds in the case of tripling producers` rate of return, GRI contends.

The upshot for the U.S. gas industry`s future: Either sustained low prices or production collapses leading to episodic price spikes.

Today`s market
Well, there`s no reason to dwell on that gloomy crystal ball now that gas prices continue their inexorable march to the $3/Mcf level by yearend, right?

Natural gas in storage remains at a deficit compared with levels a year ago, and demand is spiking with a wave of hot, muggy weather across much of the U.S. Injection rates slipped at the end of last week, and temperatures are expected to moderate later this week, so the year-to-year storage deficit could dwindle. Nuclear and hydro output remain robust, helping keep a lid on gas prices, as is the deliverability situation, with producers not yet strongly responding to higher oil and gas prices with dollars for rigs.

But the first signs of increased E&P budgets are materializing, and much of that is targeted for gas. Depending on how aggressive the upward ratcheting of budgets gets, we might see some dampening en route to $3.

However, one thing could cause $3 to arrive sooner rather than later: the widely expected rough hurricane season in the Gulf of Mexico. Stay tuned.

OGJ Hotline Market Pulse
Latest Prices as of July 28, 1999

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