NATURAL GAS-CONCLUSION SURPLUS ESSENTIAL TO MARKET GROWTH

The U.S. gas bubble is dead. Long live the gas bubble. No sooner did the U.S. deliverability surplus disappear than fears arose over adequacy of wintertime supply. The country now seems headed for a crunch, if not this year then soon. Consumption growth of 3%/year would take U.S. demand to 22 tcf by 1996 and nearly 25 tcf by 2000. Production capacity, now about 20 tcf/year, is falling at about 6%/year. Drilling at current levels won't reverse the decline, and pipeline imports are

Aug. 9, 1993

3 min read

The U.S. gas bubble is dead. Long live the gas bubble.

No sooner did the U.S. deliverability surplus disappear than fears arose over adequacy of wintertime supply. The country now seems headed for a crunch, if not this year then soon. Consumption growth of 3%/year would take U.S. demand to 22 tcf by 1996 and nearly 25 tcf by 2000. Production capacity, now about 20 tcf/year, is falling at about 6%/year. Drilling at current levels won't reverse the decline, and pipeline imports are approaching their limit.

A price recovery has stimulated gas well drilling this year. This is crucial for the coming winter because pipelines, marketers, and distributors need to rebuild inventories, heavy withdrawals from which depressed prices early last year. At this point, however, no one can be certain that supply will be adequate if winter is especially cold this year - or in 1996 or in 2000. And it will take only one supply failure to stymie growth in vital gas markets.

PRICE CRUCIAL

The future of natural gas in the U.S. depends on a reversal of the slide in domestic production capacity. Gas well drilling must increase. For that to happen, prices at the wellhead must stabilize at some level above recent averages. For the sake of market growth, however, prices can't rise too much; indeed, competition from other fuels will ensure that they do not. Producers thus must keep finding ways to reduce costs - both in their own operations and in functions downstream of the wellhead.

Producers also must learn to live with, even welcome, surplus. The bubble depressed prices, to be sure, but low prices set gas back on the track toward market growth. As the first editorial in this series pointed out, environmental politics may embrace natural gas now, but what about 5 years from now, when global warming no longer scares people and when hardware essential to gas supply development be-ins to compete with owls and minnows for real estate? Gas then will have to fall back on economics.

It is a fact of economic life that markets require standing surpluses of essential commodities. For gas markets to grow without the unreliable boosterism of environmental politics, gas deliverability at any given time will have to exceed normal levels of demand. Markets in simple balance will not grow. Simply balanced markets cannot handle the type of surprises that make customers seek alternatives.

DELIVERABILTY QUESTIONS

For the moment, the U.S. gas market is simply balanced. There's plenty of gas in the ground. But can it be delivered in a pinch? It's a question that anyone concerned about gas market growth should be asking now, not just in the U.S. but around the world.

Producers everywhere must make accommodating surplus as important as controlling costs. That means they must learn to hedge prices, to negotiate contracts creatively and flexibly; to participate in unfamiliar but related businesses such as marketing and storage, and to adapt to the changing needs of their customers. Some producers are doing all these things and more. They're prospering. After all, producers' new tasks amount to nothing more than sensible practice in any competitive business.

For this reason, U.S. gas market changes have global significance. The regulatory overhaul forcing U.S. producers and pipelines to discard old habits responds to market realities that are, by nature, universal. Throughout the world, market growth is the exciting and imminently realizable hope for natural gas. But security of supply-an essential ingredient of which is some managed measure of surplus-is the key to making it happen.