Analysts see problems for North American gas market

Jan. 21, 2005
The North American natural gas market is tight and must develop new sources of supply and the infrastructure to bring gas to market over the next 15 years, said a panel of experts at a conference in Houston.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 21 -- The North American natural gas market is tight and must develop new sources of supply and the infrastructure to bring gas to market over the next 15 years, said a panel of experts at a conference in Houston.

Supplies are tight, and prices are high and volatile, pointed out said Donald F. Santa, president of the Interstate Natural Gas Association of America.

"Demand is being destroyed in some sectors and yet is still growing in others," he said at the conference, which was sponsored by Platts. "And there is increased difficulty in accessing supply resources and in constructing infrastructure."

Without LNG and gas from Alaska and Canada's Mackenzie Delta, he said, "We're not going to see North American supply grow over 25 tcf, which is where we roughly are right now. If we don't get increased supply from the Rockies, perhaps we'll see a decline in North American gas supply. This highlights the importance of access to these frontier resources both in the Lower 48 and accessing supply from Alaska, Mackenzie, and of course LNG."

Nevertheless, he said, "There is a sufficient resource base available in North America and around the world that can be developed and delivered to the North American market at prices that will allow the gas market to continue to grow. But this is not going to occur without construction of new facilities to access and deliver those frontier gas supplies. We're not just talking about access here. Infrastructure is a very important part of the picture, both pipe and storage and then LNG infrastructure to get the US more integrated into the world of gas markets".

North American natural gas production has temporarily stabilized, increasing by increments of less than 1% in 2004-05 before undergoing "a similar degree of decline thereafter that could be largely permanent," said Edward Kelly, vice-president of North American gas and power at Edinburgh-based Wood Mackenzie Ltd.

"We are looking at a bare production increase this year, and we're looking at a bare increment in LNG deliveries this year enabling some growth of demand," he said.

Kelly sees "a little more optimism in the near term but not the long term regarding the number of [natural gas] molecules that Canada can deliver to the US."

He said, "In a sense, Canada is choking on storage more than the US is choking on storage, and that will result in an increment of exports to the US of about 400-500 MMcfd from Canada on average this year, allowing a little more demand growth to occur this year."

Like others in the industry, Kelly expects the US market for LNG to grow over the next few years.

"I think a lot of critical decisions will be made in 2005 about the LNG business that will determine what kind of imports we will have or won't have in 2008 and 2012 and even beyond that time frame," he said. "But it won't overcome the natural tendency of US production and Canadian production to decline. It won't allow residual fuel oil demand to be backed out again by natural gas. There aren't enough natural gas molecules to recapture that market through US production."

Land access
Richard Watson, senior physical scientist of the Fluid Minerals Group of the US Bureau of Land Management, cited a recent examination of access to federal lands in the Montana Thrust Belt and Powder River, Green River, Piceance, and San Juan basins in the Rocky Mountains.

"On a surface acreage perspective, it appears that only 39% of those federal lands are available for leasing under standard lease terms, 25% available with additional restrictions, and 36% totally unavailable," Watson said. "However, if you look at the oil and the gas resource volumes, 57% of the oil and 62% of the natural gas is available under standard lease terms and only 16% of the oil and 12% of the natural gas is completely unavailable."

He said BLM officials are working on a phased project that, when completed, "will have inventoried over 90% of the btu-equivalent of the federal onshore endowment in the US." Watson said BLM made "some improvement" in 2003 in reducing the amount of time it takes to process drilling permits. However, he said, that process fell behind in 2004 because of "several thousand" coalbed methane drilling permits "that were held up in the Powder River basin pending completion of environmental impact statement for final processing that year."

An INGAA study and forecast for 2003-10 indicates that the greatest increased flows of gas will be "coming out of the deep gulf, the Rockies, and new LNG imports," said Santa. During that period, INGAA sees "no significant increase in Canadian imports until the northern projects are developed. Offshore eastern Canada is dependent on development plans. Production from eastern Canada has not proven as prolific as was once hoped," he said.

LNG imports are expected to increase greatly during this period. But Santa cautioned, "Locations of LNG terminals will affect flow patterns, and that very much will affect where and how much new pipeline and storage capacity is needed."

Santa assumes that some new LNG terminals will be built in the Northeast. But if LNG capacity in that area is not increased, he said, the US will require more LNG import capacity on the Gulf Coast. Moreover, he asked, "What happens if the maritime provinces of Canada become the place where people look as being the closest to the market for bringing LNG? What does that do to pipeline capacity needs there?"

To comply with the expected growth in gas demand and shifts in supplies, Santa said, an investment of $61 billion in pipeline and storage facilities would be necessary through 2020.

"Of that, $18 billion is associated with the arctic project, about 45,000 miles of pipe will be required�35,000 of new pipe and 10,000 of replacement pipe," he said.

"This is an important point to bear in mind, that we've got in some instances a fairly old and aging gas pipeline infrastructure. Add onto that the requirements imposed by Congress under the Pipeline Safety Improvement Act of 2002 and . . . regulations promulgated by the Office of Pipeline Safety, and a not insignificant part of the industry's challenge is going to be replacing existing pipe. Also, there will be 7.8 million hp of compression to be added in this period" through 2020, he said.

The INGAA study projects additional costs resulting from delayed construction of natural gas pipeline and storage infrastructure that would total $200 billion by 2020 on "the assumption that there's a 2-year delay," said Santa. He cited another study by the National Petroleum Council, which looked at the problems of access to public lands and estimated delay costs of $300 billion.

"Add those two together and you start to see the impacts of lack of access and delay to the cost of infrastructure," Santa said.

Contact Sam Fletcher at [email protected]