A natural gas crisis is brewing, with too little new North American supplies coming on stream to significantly affect rapidly growing demand, Dain Rauscher Wessels Inc. analysts said Tuesday at the start of their 3-day annual energy conference in Houston. Supply and demand dynamics are shaping up for trouble, especially for a peak demand period in early spring.
In various presentations during the first day of that conference, producers and service company executives said they see 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.
Yet despite a sharp increase in domestic gas drilling since last year, gas production from the lower 48 states remained flat through July, said Ray Deacon, who follows exploration and production operations at Dain Rauscher Wessels.
While total gas reserve replacements will be "well in excess of 100% this year," Deacon said, "we won't see a real increase in supplies because most of the drilling is in areas where additional pipeline is currently or soon will be needed."
He predicts lower 48 production will grow by 0.5 to 1 bcfd in 2001, primarily as new coal bed methane and Gulf Coast production offset continued declines in the Gulf of Mexico. Canadian imports also should grow by 200-500 MMcfd next year.
But new drilling in the deep waters of the gulf and other frontier regions, along with renewed interest in Gulf Coast exploration, will not provide a significant supply boost over the next year, Deacon predicted.
And although imports of liquefied natural gas�particularly from Trinidad�are rising significantly "in percentage terms," he said, it is building "from a very low level."
Meanwhile, fellow analyst John Myers sees growing demand for gas, led by 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 electrical generation plants are planned to begin operations 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 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.
In the interim, the previously dysfunctional Organization of Petroleum Exporting Countries has regained control of the world oil market. With 90% production capacity utilization, cartel 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 expert.
Canada will be looking to increase its production, while national and integrated oil companies will accelerate spending in international markets, 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.
Shortages of qualified workers, critical equipment, and manufacturing equipment will become "the most critical factors facing this business," he predicted.