Stratospheric prices of natural gas in the US summon new attention to an important and officially favored source of energy. They recently provoked calls from industrial consumers for a reorientation of the US government's approach to energy policy. And they raise questions about long-term evolution of the gas market.
Cold weather in major gas markets has stimulated demand enough to seriously strain supply. Inventories are low. The March gas contract on the New York Mercantile Exchange reached a record-high $11.89/MMbtu during overnight trading Feb. 24. Spot prices have reached levels three times that high. Although easing back at the beginning of last week, the NYMEX price remained above $7/MMbtu.
Drilling up
Elevation of prices at the wellhead has stimulated gas well drilling. But increased drilling no longer means increased production. In 2001, after a busy drilling year occasioned by the last zoom in prices, gas production barely increased. Much US production is in advanced stages of depletion. Technology allows for accelerated production from individual wells but can't reverse the overall decline in productivity of new wells tapping a mature resource.
Two Lehman Bros. analysts recently estimated that production added per active rig fell to 14.1 MMcfd in 2001 from 23.3 MMcfd of gas in 1999. The analysts, Thomas R. Driscoll and Sangita Jain, said: "We do not believe that the industry can drill its way out of this situation of declining production."
If they're right and demand is to grow, imports have to rise. But import volumes have limits, including the decline of well deliverability in the traditional producing area of western Canada. It's very likely, therefore, that gas prices will stay high at least through this year. So the gas market must balance the hard way—by jettisoning demand.
Much of the adjustment will occur in the market's industrial sector, which includes petrochemical manufacturers using gas as feedstock. Ammonia makers already have idled plants because of the high cost of gas. It's from the distressed petrochemical industry that the calls have emerged for a new look at energy policy.
In a statement to the Senate Committee on Energy and Natural Resources, the National Petrochemical & Refiners Association cited projections for a 60% increase in US natural gas demand by 2020, some of it resulting from government policies encouraging the use of gas as a fuel. NPRA urged Congress to "be mindful of what increased demand will do to the costs and competitiveness of businesses that use this fuel as a feedstock." And it urged "caution as Congress and the administration consider policies that will accelerate the demand for natural gas unless they are accompanied by efforts to increase its supply."
That comment captures the essence of recent deliberations about energy policy: fuel choice by the government and reluctance to allow development of federally owned resources in the interest of future supply.
NPRA points out that tax incentives for vehicles using alternative fuels will drive up demand for natural gas. The ethanol mandate passed by the Senate would have the same effect by stimulating construction of distillation plants likely to be fueled by gas.
"If policies regarding natural gas are to be modified," NPRA said, "they must include increased access and development opportunities to onshore public lands as well as those on the Outer Continental Shelf." A similar appeal came in a statement by American Chemistry Council Pres. Greg Lebedev, who also urged the government to streamline construction of US pipelines and capacity to import liquefied natural gas and supplies from Canada.
Attention to supply
The gas market, with prices painfully high to all consumers, is crying out for new attention to supply. Announced plans for new LNG import schemes and expansion of existing facilities are important responses. So are increases in gas well drilling on both sides of the border.
The government must respond as well. It must shed its reluctance to lease and allow oil and gas drilling on federal land—including the ridiculously constricted eastern Gulf of Mexico.
Policies that encourage consumption of something while deliberately limiting supply can't work. The effects of policies thus conflicted on natural gas are clear. They're also casting dark shadows into the future, about which more will appear in this space next week.