One of the many nice features of natural gas is abundance. In those inevitable periods when existing production cannot satisfy demand, additional production can be brought on stream in fairly short order. All it takes is well-located drilling.
The U.S. now finds itself in one of those periods of strained gas supply. Increased drilling should be a natural response to this market turn, accompanied as it is-and should be-by rising prices. The consequent supply gain would contribute to the market's inevitable correction. But drilling, the antidote for limits on gas supply, faces limits of its own.
The deficiency
So how short is the market? Since supply and demand must balance, deficiency is a tricky thing to measure. It must be related to some hypothesis about the volumetric level at which supply and demand would have balanced under different conditions.
Thomas R. Driscoll of Salomon Bros., New York, recently assessed total supply against earlier forecasts of fourth quarter demand. On that basis, he says, U.S. production comes up 3 bcfd short of need, net of imports from Canada, which are limited by pipeline capacity, and other sources. Next year, the shortfall will ease-but only slightly-to 2 bcfd.
As it should do when supply becomes the limiting factor, the market is high-grading consumers, allocating gas to those willing to pay the most for it. Consumers most resistant to price gains switch fuel or go without. Electric utilities, which have alternative fuels, thus have reduced gas consumption by a total of 384 bcf so far this year, Driscoll says. And storage operators, which don't have to hold inventories if doing so costs too much, have surrendered 181 bcf.
These are natural consumption responses to gas prices lately exceeding $3.50/Mcf. And Driscoll thinks prices may stay in the $2.50-4/Mcf range through the winter, which has barely begun.
Elevated prices have stimulated drilling of gas wells. But drilling hasn't increased enough to quickly bring supply back into line with earlier forecasts of demand. In a country rich with gas resources, this should raise alarms.
It is not that the U.S. faces a calamitous slump in gas supply. Plenty of gas is available in the world-at a price. But the U.S. gas resource could be developed at prices below levels necessary to attract imports-especially of liquefied natural gas. So why isn't domestic drilling yielding more supply?
Part of the reason is that too much of the resource can't be drilled. Chevron U.S.A. Production Co. and partners brought this problem into focus late last month with their announcement of plans for significant gas well drilling in the Gulf of Mexico. They want to develop a discovery on the Destin Dome, a structure that may hold 17 tcf of gas (see Newsletter).
In Florida, however, the very act of drilling is thought to degrade the environment. Protests against the Chevron proposal began immediately. This is one of the great ironies of modern politics. To the west of Florida, offshore drilling contributes mightily to U.S. energy supplies and coastal economies without spoiling nature. Yet, for some reason, the Sunshine State is different. For some reason, so is North Carolina, which successfully kept Mobil Corp. from drilling a large gas prospect on a federal lease earlier this decade.
Costs of not drilling
Such aversion to drilling, to the extent that it succeeds politically as it did in North Carolina, curtails gas supply as efficiently as do physical limits on the capacities of pipelines from Canada. It thus carries a price. When production from existing sources is at capacity, gas not available from regions that can't abide drilling must come from other, more expensive sources.
As antidrilling fervor grows in Florida and gas prices rise nationwide, the industry should welcome a new chance to discuss what Americans sacrifice when they ignore supply and balk at development of important natural resources.
Copyright 1996 Oil & Gas Journal. All Rights Reserved.