Natural gas demand in the US and Canada has caught up not only with wellhead supply but also with existing storage capacity and transportation infrastructure, reported Merrill Lynch Global Securities Research & Economics Group.
"It's going to be a long, hard, expensive slog," analysts Sam Brothwell, John Herrlin, and Andrew Fairbanks said in a May 26 executive research summary. "New supply sourcing is the central issue, and that requires downstream infrastructure to be addressed in a comprehensive manner."
Expecting multibillion-dollar capital expenditures to keep gas supplies flowing reliably during the next several years, they listed four key issues:
- LNG infrastructure, which Merrill Lynch believes is likely to cost more and take longer to implement than many industry experts predict.
- New gas storage will be required with anticipated increased LNG imports.
- The pipeline network needs some remedial upgrading and some new capacity.
- Order must be brought to chaotic, displaced markets that focus on the short term rather than the long term.
"Natural gas prices are likely to remain high and volatile, and temporal physical shortages cannot be ruled out," the analysts said.
Supply, demand
"By our estimates, [US and Canadian] natural gas productive capacity in 2003 declined 2-3% and could go down 1% in 2004. Today, the natural gas industry faces the same conundrum that oil faced in the 1950sUthe nation is hooked, domestic supply can no longer meet demand, imports (LNG) are inevitable as is a changing industrial demand landscape," they said.
Currently, US wellhead capacity is 49-52 bcfd, and Canadian wellhead capacity is 20-22 bcfd. Meanwhile, peak US winter demand can reach 86 bcfd, and gas production is in decline.
The US and Canada represent less than 10% of the world's known gas reserves, but the two nations consume 29% of the world's total gas output.
"Higher prices and lackluster economic conditions may slow growth, but they won't reverse it," they said.
LNG will augment the US gas supply, but the industry must increase gas storage capacity along with increasing LNG import capacity, they said.
"Gas storage is a critical infrastructure component to addressing current and long-term supply security. Over the last decade, likely less than 100 bcf of new storage facilities has been added, and most of that capacity was for peaking-related activitiesU. More baseload storage facilities need to be built, but that's not easy or cheap," they said.
Infrastructure needs
Postwellhead infrastructure capital expenditures are estimated at $5-10 billion/year for the next several years, the analysts said.
They said pipeline costs are estimated at $1-2 billion/year, which some believe is a conservative figure. Estimates for construction of the proposed Alaska gas pipeline range up to $20 billion total.
Regarding LNG, each additional 1 tcf/year of import capacity is expected to cost at least $1 billion, including both new terminals and shipping capacity.
Merrill Lynch believes that 2-4 tcf/year of imports will be needed in 5 years.
Merrill Lynch believes that an incremental 1 tcf/year of imported LNG will require 150-250 bcf of incremental gas storage, expected to cost $10-12 million/bcf. That suggests $1.5-2.5 billion/year in gas storage investment.
"The industry's market capitalization has fallen precipitously in the past 5 years. Clearly, there is a big need for incremental infrastructure investment, but a smaller number of qualified players. At the same time, the industry's risk profile has risen through deregulation and its attendant foibles. As a result, addressing the supply-demand imbalance will not only require capital at the drill bit, it will require capital to build the downstream infrastructureUin a riskier environment," they said.
LNG is expected to become the marginal gas supply source, and it might set the market clearing price, they said.
"Endusers will embrace it as a competitive weapon, and ultimately, it probably will bring gas prices down, but not to the $3[/Mcf] level seen just a few years ago," they said.
