Continued disruption by Hurricanes Katrina and Rita of natural gas supplies from the Gulf of Mexico illustrates “a problem we have been trying to ignore,” says Nora Brownell of the US Federal Energy Regulatory Commission.
“We have insufficient [gas] supplies to support our economy,” she told a Ziff Energy Group conference on gas storage in Houston. “We cannot rely on one geographic region.”
The US Minerals Management Service said Mar. 8 that 87 platforms on federal oil and gas leases in the Gulf of Mexico are still idle as a result of damage inflicted when Katrina roared through the central gulf last August, followed by Rita in September. Some 1.4 bcfd, or a little more than 14%, of gas production from the gulf is still shut in, as is 348,253 b/d, or 23.2%, of crude production. Cumulative production lost since Aug. 26 when Katrina hit that area now stands at 672.7 bcf of gas and 134.5 million bbl of crude. That’s equivalent to 18.4% of the gas and 24.6% of the crude produced annually from federal leases in the gulf.
The disruption to US oil and gas supplies raised expectations last fall for energy prices even higher than were seen this winter.
“The good news is that it wasn’t cold this winter,” Brownell said. “The bad news also is that it wasn’t cold this winter, so people-particularly in New England-who worried that high gas prices and potential shortages of supply would affect [power] generation, don’t believe it because it didn’t happen.”
She said: “People find it hard to accept that in fact supplies are finite because we’ve learned to take energy as an entitlement, not something that you buy and sell. We also have a quarter-to-quarter mentality. We don’t like to invest in big, expensive infrastructure. We’re largely living on our great-grandparents’ largess, whether it’s roads, water, sewer, pipelines, whatever.”
Still, Brownell said, “High gas prices capture people’s attention like nothing else. Alternatives like LNG begin to look more attractive.”
LNG prospects
Demand for natural gas is projected to increase at an average rate of 1.5%/year through 2025, primarily as a result of increased electricity generation and industrial applications. Industry experts agree new gas supplies will come from unconventional resources such as tight gas sands, shale, and coalbed methane; natural gas from Alaska; and LNG.
Under the Energy Policy Act of 2005 (EPACT) signed into law last summer, Brownell said, “We have a very clear mandate to approve under very specific circumstances LNG facilities and to look at all the issues, safety and environment. No one wants anything in his backyard. It behooves all of us to work with the local folks to understand and value that asset as part of the community.” She called on the industry to help “educate people and governors” where construction related to LNG is under consideration. “I think people will make the right choices if we define it in a way they understand.”
EPACT gave FERC additional tools to address high and volatile gas prices on a long-term basis. “The certainty of EPACT allows people to make difficult decisions,” Brownell said. “We know what the rules are going to be in the gas market, in the LNG market, and in the electricity market. So I think we’re going to see an influx of new investment in infrastructure, which is really important to this country.”
FERC has issued rules establishing mandatory prefiling procedures for all applicants who want to site, construct, and operate LNG terminals and related facilities.
FERC works closely with Canadian and Mexican regulators on LNG and pipeline sitings. “We value our trading relationships with both Mexico and Canada,” said Brownell. However, she said, “The thought that we can rely on everyone else for supply is a little bit condescending. It’s terrific that we’ll have LNG options in both Canada and Mexico, but they both have their own economies to support, and we have to recognize that, as their economies are growing, they might need some of that supply.”
Moreover, transportation costs of gas from LNG terminals in Canada and Mexico “are pretty significant,” said Brownell, “so if we’re concerned with high costs, we don’t want to choose options that add a few dollars to transportation to already high-priced gas.”
The Alaskan gas pipeline “will be part of the future,” in 2013-15, Brownell said, “but it shouldn’t significantly impact the short-term decisions that we need to make” on other issues.✦