By OGJ editors
HOUSTON, Sept. 16 -- Development of new LNG facilities is the only way to reduce prices and volatility in the North American natural gas market, and development must begin in 2008, said Michael Zenker, a senior director of Cambridge Energy Research Associates, in testimony before the US House Government Reform Subcommittee on Energy and Resources.
"It will be important to facilitate and not to impede this important new long-term resource," Zenker said Sept. 14.
Meanwhile, the US government must encourage conservation and fuel flexibility this winter to help relieve an already tight gas market that has been ratcheted even tighter by Hurricane Katrina. That hurricane, which disrupted natural gas production and processing along the Gulf Coast, "only added to the picture by delivering a real shock, driving prices further up, and creating considerable anxiety about the adequacy of winter supply," Zenker testified.
"Without a strong dose of good news, prices should stay at higher levels until it is clear that the winter will not deliver a demand shock, and that will not be known until most of the winter has passed," he added.
Strong conservation efforts produced dramatic cuts in consumption during California's electric power crisis in 2001. If all residential and commercial customers turned their thermostats down just 2° F. this winter, the decline in natural gas consumption would more than offset loss of supplies resulting from Katrina, Zenker said.
To promote fuel flexibility, Zenker said, "Restrictions on all nongas-fired power plants should be weighed against the additional demand pressures that are shifted to the natural gas market owing to these restrictions. Judicious flexibility can be of critical importance."
Escalation of natural gas prices this year has triggered strong investment by companies seeking to find and develop new supplies. But while US drilling activity is now at the highest level since February 1986, most of North America's gas supply comes from mature producing areas that are in collective decline, with "additional gas resources known to exist in areas that are currently off-limits," said Zenker.
Although drilling for gas in the US has risen by more than 175% since 2002, gas wellhead capacity has declined more than 2% during that period. CERA expects combined US Lower 48 and Canadian gas supply to remain essentially unchanged between 2004-10 and to decline 12% from 2010 to 2020, from lands currently available for drilling.
LNG is to become an even more important component of the country's natural gas supply. "CERA sees no feasible way to meet long-term natural gas demand without substantial new LNG facilities," Zenker told the House subcommittee. CERA estimates the combined US and Canadian market will require 10 bcfd of LNG supply by 2010, almost half of current worldwide deliveries. That will require the LNG industry to grow at a high rate, Zenker said.
While noting that new terminals will be built to withstand very large hurricanes, Zenker said Katrina "underscores the need to focus on developing receiving terminals not only in the Gulf [Coast area], but also in other geographic regions closer to the consuming markets."
While the recent spike in natural gas prices was fundamentally a supply problem, he said, the "virtually assured" demand growth ahead will provide further challenges. Growing use of gas in the residential, commercial, and electric power sectors, combined with lengthy lead times—often in excess of a decade—for construction of coal and nuclear generation facilities, and restrictions on nongas-fired power plants, add up to CERA's forecast of an 8.2% increase in US natural gas demand by 2010, with another 7.2% rise expected by 2020.
