The value of natural gas production in the U.S. in 1993 exceeded that of crude oil output for the first time in history.
The reversal owes as much to trends in price as in production and, most recently, record frigid weather in much of the U.S. Another key factor is a newly revitalized, restructured gas industry operating in the most unfettered regulatory environment in recent memory.
The industry's sterling performance in accommodating the surge in demand caused by the arctic cold that steamrollered across North America early in the 1993-94 winter strengthens the natural gas case for reliability. And that can only enhance the industry's prospects for adding more long term supply contracts.
That represents a coming of age for a fuel once universally disposed of as an unwanted byproduct of crude oil production. It's also another watershed for an industry that has undergone a series of wrenching changes in the past decade or so and still faces new uncertainties and challenges in the years to come.
Looming on the immediate horizon is the prospect of an extended slump in oil prices, which could mean that natural gas dominance in U.S. petroleum industry revenues will be short lived if low cost oil recaptures market share from gas.
While that may temporarily dethrone natural gas from its new top slot, the reversal in 1993 represents what is likely to be a long term trend for the U.S. petroleum industry.
NATURAL GAS ASCENDANCY
Oil & Gas Journal calculations show total wellhead revenues for natural gas produced in the U.S. reached $38.8 billion in 1993, up from $32.6 billion in 1992.
That compares with wellhead revenues for crude oil of $35.8 billion, down sharply from $41.8 billion in 1992.
Accordingly, the natural gas share of all U.S. wellhead revenues from oil and gas wells rose to 52% in 1993 from 43.8% the year before. At the same time, crude oil's share of all U.S. wellhead revenues slid to 48% from 56.2%.
OGJ estimates the average wellhead price of natural gas in 1993 at $2.02/Mcf, up sharply from $1.74/Mcf in 1992. That's the biggest year to year price hike since the industry's salad dais in 1980-82. In nominal terms, natural gas prices are almost tenfold their levels of the overregulated early 1970s.
Natural gas production also jumped in 1993, reaching 19.2 tcf, up from 18.7 tcf in 1992. It also represents the first time U.S. gas production has flirted with the 20 tcf mark since 1981, when nominal gas prices almost doubled in a 2 year span.
In a comparison of the same periods for crude oil, OGJ estimates the average U.S. field price was $14.34/bbl, representing a drop from $15.99/bbl in 1992 and a decline of more than $5/bbl in 3 years.
U.S. crude production has been on a much longer slide. Production fell to 6.842 million b/d in 1993 from 7.171 million b/d in 1992. U.S. crude flow has fallen every year since 1985, when a nominal oil price almost twice today's level spurred 5 consecutive years of production increases.
While a lingering crude price slump might deflate a near term outlook, OGJ for now predicts natural gas wellhead revenues in nominal terms will total $84.7 billion on an average price of $3.90/Mcf in 2000, compared with $43.3 billion and $20.50/bbl for crude oil. That compares with wellhead revenues of $83 billion for crude oil and $43.7 billion for gas in 1983.
NATURAL GAS THE DRIVER
Natural gas increasingly is the driver in the North American strategies of many U.S. petroleum companies.
The fuel is dominating U.S. reserves transactions, reports Strevig & Associates Inc., Houston. Of 66 reserves transactions Strevig tracked in fourth quarter 1993, natural gas accounted for 67%. Of those, 33 involved offshore properties, where natural gas accounted for 74% of the total reserves traded. Gas-dominated transactions represented 95% of all offshore transactions completed in 1993, Strevig said.
Natural gas is dominating many companies' capital spending plans. Unocal Corp. earlier this month approved a $1.46 billion capital investment plan for 1994 that focuses on development of the company's natural gas reserves in North America and Southeast Asia. Unocal Chairman Richard J. Stegemeier said his company is allocating its capital to give priority to natural gas development projects, particularly in North America, that can provide a high return on investment and generate substantial cash flow for the company.
"Domestic natural gas prices present attractive long term price potential, and Unocal has a particularly strong natural gas position," the company said. "Natural gas accounts for about 60% of Unocal domestic reserves on a crude equivalent basis."
Stegemeier noted Unocal in 1993 began a 3 year accelerated drilling program to expand development of its large inventory of undeveloped resources in North America.
"We are continuing with that program, but because of the drop in crude oil prices we have shifted our capital resources to focus on our natural gas prospects and defer some crude oil development work."
WEATHER'S ROLE
The recent severe cold snap in North America cemented what has become commonly accepted wisdom in the U.S. petroleum industry: The long natural gas deliverability "bubble" is finally gone.
NatWest Securities Corp., New York, noted weather thus far in 1994 has been 13% colder than normal and January weather was 26% colder than in January 1993, boosting gas demand.
"The frigid weather has resulted in material storage withdrawals," NatWest said.
The analyst estimated the U.S. gas storage level at 2 tcf as of last Jan. 31, or 12% below normal. Assuming a normal February and March, it said storage at the end of the heating season could be at 1.4 tcf, or 15% below the normal 1.7 tcf.
"We could get very close to the record low of 1.237 tcf set last year," NatWest said. "Thus, we will have 5 months to inject 1.8 tcf vs. the usual 1.5 tcf...(as a result) there will be an incremental 2 bcfd of demand, or 4-5% of 43 bcfd of actual consumption."
The role of oil prices in the natural gas outlook may be somewhat overstated.
NatWest sees the possibility of the resid to crude ratio moving higher with a resid market that continues to Lighten, offsetting any weakness in oil prices. It puts that ratio currently at 77% and recently as high as 95%.
"At $15/bbl crude and 95%, resid would sell at the equivalent of $2.25/Mcf," the analyst said.
1993 A KEY YEAR
For the U.S. natural gas industry, 1993 was a pivotal year that set the stage for a healthy operating environment for years to come.
It marked the beginning of the first winter of operations under Federal Energy Regulatory Commission Order 636, the omnibus U.S. regulatory package that effectively removed the dregs of excessive government oversight and introduced an unprecedented level of competition to the in us try. By the end of last january the country had experienced some of the most severe weather since December 1989, noted Everett S. Gibbs, Arthur Andersen & Co. managing director of natural gas industry services.
With the resulting record demand levels, the U.S. gas industry met the challenge of accommodating customer needs while living up to Order 636's goals of increased flexibility and reliability (OGJ, Feb.7, p. 19).
Gibbs said, "This industry has radically modified its operations over the last several years, restructuring, downsizing, creating new products and services, and, in short, becoming a more competitive and efficient industry. As a result, we are seeing gas prices largely dictated by supply/demand balances and the gas transmission and distribution markets operating, in some respects, in a more reliable manner than even the electricity markets."
SHRINKING SUPPLY MARGINS
Gibbs noted in a study on 1994 North American natural gas trends Arthur Andersen conducted with Cambridge Energy Research Associates, Cambridge, Mass., that much of the price pressure in today's market is related to narrowing supply margins.
Among those supply factors are:
- Reserves at yearend 1992 of 155 tcf, only 1 tcf more than the historical low.
- A 2 year decline in reserves while production rose modestly, resulting in a reserve to production ratio of 9.1, the lowest level in more than a decade.
- An increasingly efficient market that is replacing reserves on an "as needed" basis, augmenting the importance of gas Storage.
Gibbs also pointed to industry's response to this squeeze on deliverability.
"In 1993, we began to see a cautious return to development efforts by producers as the number of rotary rigs (drilling for gas in the U.S.) moved from 268 in March 1993 to over 400 in December 1993.
"While the rigs in use are still below (the previous) yearend, the rise has occurred without the stimulus of the pending expiration of Section 29 credits (for unconventional gas production)."
The North American gas industry's reponse to three major challenges related to the new market dynamics will shape its future growth and prosperity, said Gibbs. The challenges:
- The risk inherent in commodity cycles is simply a function of an open market responding to supply and demand stimuli. The risks can be managed, and the financial tools to meet this challenge exist now.
- Interfuel competition may constrain market expansion. However, gas prices cycling at less than $2.50/Mcf create an incentive to develop reserves and provide a market clearing price that may be attractive to electric power developers.
- The effect of competition beyond the city gate. If this winter ultimately substantiates reliability of the interstate transmission system, it could unleash the same tidal wave of competitive forces further downstream.
Meeting those challenges will help the U.S. gas industry build on what it accomplished in 1993: firmly marking the transition from unwanted byproduct to second tier commodity to "fuel of the future."
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
