A natural gas crisis is brewing, with too little new North American supplies coming on stream to significantly affect rapidly growing demand.
Supply and demand dynamics are shaping up for trouble, especially for a peak demand period in early spring.
So concluded Dain Rauscher Wessels Inc. analysts late last month at the firm's annual energy conference in Houston.
Producers and service company executives at the conference said they see US upstream activity increasing through 2001 and beyond, primarily as a result of growing domestic demand for natural gas and a slower recovery of international oil markets.
However, a sharp increase in US gas drilling has done little to allay concerns over the US gas supply outlook, Dain Rauscher analysts have noted. Natural gas production in the Lower 48 has remained flat, and there will be little relief in the way of new supplies, because much of the new drilling is occurring where there are pipeline capacity constraints (OGJ, Sept. 25, 2000, Newsletter, p. 5). While overall gas production in the Lower 48 is expected to climb next year, the combination of persistent growth in gas demand and continued declines in the Gulf of Mexico will mean rising imports of Canadian gas.
And although imports of LNG-particularly from Trinidad and Tobago-are rising significantly, in percentage terms, that increase starts from a very low level.
Power sector demand
Meanwhile, Dain Rauscher analyst John Myers sees growing US demand for gas led by a flurry of construction of new power plants. Although the recent fly-up of gas prices has clearly affected industrial demand, he said, that is more than offset by growing demand from new gas-fired power plants.
More than 275 gas-fired electric power generation plants are planned to begin operations in the US through 2006, up from 158 a year ago, which would increase gas consumption by more than 8.5 tcf. Even if all of those plants are not built as planned, Myers said, there will be a significant jump in demand for gas as a result of the pending "death" of coal as a competing fuel.
With environmental concerns on the rise around the globe, Myers predicted that, at some point, there will be no place for coal outside of steel manufacturing.
Coal supplied 24% of total world energy in 1999 and 25% of US energy. As coal is replaced in those markets, Myers said, future consumers will pay a premium for gas "for environmental reasons."
Meanwhile, he said, the US appears headed into winter with gas inventories of less than 2.585 tcf-"the lowest ever," down 140 bcf, or 5%, from the previous low in the fall of 1996.
Another warm winter like that in 1999 would result in a similar drawdown of 1.964 tcf, with a near-record low of only 621 bcf remaining in inventory next spring. But a cold winter could trigger "a disaster scenario," with a drawdown of nearly 2.4 tcf. That would leave a record low inventory of 186 bcf next spring at a period of record high demand, said Myers.
Upstream activity surge
In the interim, a surge in upstream activity will continue because the previously dysfunctional Organization of Petroleum Exporting Countries has regained control of the world oil market. With 90% production capacity utilization, the group's discipline works well enough to maintain an average price of about $25/bbl for West Texas Intermediate crude through 2001 "and probably longer," said Dain Rauscher Wessels analyst Stephen Smith.
Spurred by those factors, the US rig count will be up 45% this year and increase another 20% in 2001, said James Wicklund, another Dain Rauscher Wessels analyst.
Canada will be looking to increase its production, while national and integrated oil companies will accelerate spending outside the US and Canada, he said.
But the service industry's need to build new rigs and other equipment is still "held hostage by investors [who] want to own company stocks up to the day they add new capacity," Wicklund said.
