NATURAL GAS TO START LONG PERIOD OF GROWTH DURING NEXT 3 YEARS

Pressures are building worldwide to increase consumption of natural gas.

Costs and limitations in gas transportation and distribution systems prevented the intensive use of this fuel for many years. But the obstacles are clearing.

Once flared as a worthless byproduct of oil production, natural gas is becoming the fuel of choice in a growing list of applications.

Its abundance assures adequate long term supply, which, unlike oil, is unaffected by the political decisions of a group of large producers. In addition, its combustion does not create as much pollution as does that of competitors such as coal and heavy fuel oil.

During the past decade, worldwide marketed production of natural gas has moved up much faster than oil and coal production. Gas output increased from 51.8 tcf in 1982 to 72.1 tcf in 1992. This 39.2% production increase compares with gains of 13.7% for oil and 15.2% for coal.

The natural gas share of worldwide energy consumption moved up from 20.1% in 1982 to 22.8% in 1992. The biggest change was in the C.I.S. and East Europe, where the gas share of total energy use rose from 28.8% in 1982 to 41.3% in 1992.

In the OECD, the gas share of total energy use rose from 21.1% in 1982 to 21.5% in 1992. The natural gas industry was well-developed by 1982 in many industrial countries.

In the developing world, gas provided 10.4% of total energy in 1982 and 12.5% in 1992.

PRODUCTION TRENDS

Gas production has increased in the past decade, with gains of 1 tcf/year or more posted in most geographical areas.

The slowest growth has been in the U.S. and Canada, where combined production in 1992 was up only 6% or 1. 2 tcf - from the 1982 level. All the growth was in Canada, which is exporting increasing volumes to the U.S.

The main reason for the slow growth relative to the rest of the world is that the U.S. represents a mature market for gas. In some other areas, intense development of gas markets is a fairly recent development.

The world's largest gas producer is the C.I.S, with 1992 output of 25.7 tcf, 33.6% of the world total. That was down from a peak of 26.8 tcf, 37.9% of world production, in 1990.

The next largest producer is the U.S. with 1992 output of 17.7 tcf, 24.6% of the world total. Canada produced 4.1 tcf in 1992, followed by Netherlands 2.5 tcf, Indonesia 1.9 tcf, the U.K. 1.9 tcf, Algeria 1.8 tcf, and Saudi Arabia 1.2 tcf.

The largest increase in natural gas production over the past 10 years came in the C.I.S., where output in 1992 was up 9.4 tcf from 1982. This accounted for 46.5% of the total increase in worldwide production.

Asia-Pacific production moved up 3.8 tcf during the same period as a number of countries developed domestic gas industries and export trade. Australia, Indonesia, and Malaysia have developed significant liquefied natural gas export industries.

Production in the Middle East moved up 2.7 tcf during 1982-92. Countries in this region started to make use of their huge gas reserves for domestic consumption, partly in order to free additional oil for export.

African production increased 1.4 tcf in the past decade, primarily due to increased output in Algeria. A pipeline to Europe enabled Algeria to expand exports to that market.

Western Europe's natural gas production moved up 1.1 tcf due primarily to increased development of North Sea reserves by the U.K. and Norway.

Production in Latin America in 1992 was up 1 tcf from its 1982 level. There were substantial increases in output in Venezuela and Argentina.

GAS TRADE TRENDS

International trade in natural gas developed when crude oil prices rose during the 1970s and early 1980s.

An estimated 11.8 tcf of natural gas moved in international trade in 1992, 16.4% of total world output. This is up from 10.1 tcf and 14.7% of production in 1989. Earlier figures on worldwide natural gas trade movements are not available.

The fastest increase in gas trade has been in LNG movements. Since 1989, total world natural gas trade has increased 16.8%, with pipeline exports increasing 14.3% and LNG exports up 25.4%.

The world's leading producer, the C.I.S., is also the world's largest exporter. The C.I.S. exports large volumes of gas via pipeline to East and West Europe. Exports in 1992 are estimated at 3.5 tcf.

Canada was second as an exporter, with pipeline shipments to the U.S. of 2.1 tcf in 1992.

The U.S. in 1992 exported an estimated 194 bcf via pipeline to Canada and Mexico and 49 bcf of LNG to Japan.

Netherlands exported 1.5 tcf in 1992 to a number of countries in West Europe. Norway exported 911 bcf to other West European countries in 1992. Other regional exporters are Denmark, 57 bcf in 1992, and Germany, 49 bcf. All of this trade was via pipeline.

Algeria was the largest exporter outside of North America and West Europe, with 1992 natural gas exports of 1.2 tcf. This included 551 bcf via pipeline and 692 bcf of LNG. The vast majority of the exported gas went to West Europe, with small quantities of LNG to the U.S.

Indonesia was the largest exporter of LNG, with 1992 volumes of 1.1 tcf. Almost 80% went to Japan, while smaller quantities went to South Korea and Taiwan. Other countries with large LNG exports in 1992 were Algeria 692 bcf, Malaysia 346 bcf, Brunei 250 bcf, Australia 219 bcf, and Abu Dhabi 120 bcf.

Germany was the largest importer of natural gas in 1992 at 2.13 tcf. This was followed by the U.S. at 2.11 tcf, Japan 1.86 tcf, Italy 1.22 tcf, and France 1.16 tcf. All of Japan's gas imports were LNG, which represented 65% of world LNG shipments.

The next largest LNG importer was France with 325 bcf in 1992. Spain imported 201 bcf of LNG, Belgium 162 bcf, and South Korea 162 bcf.

The largest pipeline imports were into Germany, 2.13 tcf, and the U.S., 2.06 tcf. This was followed by Italy 1.2 tcf, France 833 bcf, and the former Czechoslovakia 431 bcf.

NATURAL GAS PRICES

Natural gas prices peaked in the first half of the 1980s then fell significantly, following oil prices. During the past 3 years, however, prices have recovered a portion of that decline.

The drop in prices in 1982-89 helped stimulate demand and has not significantly cut production and trade. Output and exports continued to climb through this period of declining natural gas value. In recent years, consumption has risen despite rising prices.

According to data from the BP Statistical Review of World Energy, natural gas prices peaked at different times in different areas and have subsequently followed trends that are not completely consistent.

Among European members of the Organization for Economic Cooperation and Development (OECD), the price of natural gas hit a high of $4/MMBTU in 1982, fell to $2.10/MMBTU in 1989, moved up to $3.20/MMBTU in 1991, and slipped to $2.80/MMBTU in 1992.

The U.S. wellhead price peaked at $2.70/MMBTU in 1984, fell to $1.60/MMBTU in 1991, then rebounded to $1.90/MMBTU in 1992. It will move above $2/MMBTU in 1993. The U.S. import price hit a peak of $4.80/MMBTU in 1984, fell to $2/MMBTU in 1988, and is still at that level.

The price of LNG in Japan peaked at $5.80/MMBTU in 1981, fell to $3.20/MMBTU in 1988, moved up to $4.10/MMBTU in 1991, then fell to $3.70/MMBTU in 1992.

It is apparent from these diverse price trends that natural gas is not yet a global commodity with a price dictated by a global market, as is the case with oil. Instead, there are regional markets, and conditions in these individual areas have substantial influence over price.

This may change as additional LNG volume in developed and there is more competition between natural gas exporting countries. One global factor must be taken into account: Natural gas does compete with oil in important markets, so in the long run the natural gas price is greatly influenced by oil price movements.

GAS RESERVES

Members of the Organization of Petroleum Exporting Countries hold large reserves of natural gas reserves but do not dominate global reserves to the extent they do crude oil reserves.

That may be one of the factors now favoring growth in consumption of natural gas. OPEC adds an element of uncertainty to a consuming nation's reliance on imported crude oil.

Worldwide gas reserves totaled 4.885 Quadrillion cu ft at the start of 1993. OPEC reserves totaled 1.966 quadrillion cu ft, 40.2% of the world total. This is a substantial portion of the world total, but the distance of most OPEC gas reserves from consumption centers helps keep the group from dominating gas trade.

OPEC gas production represented only 10.8% of the world total in 1992. The OPEC gas reserves/production ratio thus was 239 years.

One of the OPEC Persian Gulf countries, Iran, has the second largest volume of natural gas reserves in the world, with 699 tcf at the start of 1993. However, because of Iran's distance from any large market, only a small portion of the country's potential has been developed. At current rates of production Iran's current reserves would last 743 years.

This illustrates the relative underdevelopment of OPEC reserves. Demand gains and development of LNG trade may change this in the future, although OPEC probably won't become a dominant factor in the gas market soon.

The area with by far the largest reserve base is the C.I.S., with 1.942 quadrillion cu ft-39.8% of the world total. Unlike the Middle East, the C.l.S. has been developing natural gas for domestic consumption and for export. But even with extensive development the reserves would last 70 years at current rates of production.

Gas will be a fuel of choice as the C.I.S. countries rebuild their economies. Domestic consumption will free additional crude oil for export, a crucial source of the countries' much needed hard currency.

According to recent Energy Information Administration estimates, U.S. reserves of dry natural gas were 165 tcf at the end of 1992. This represents only 8.4 years of supply at 1992 rates of consumption.

The U.S. appetite for natural gas is large and growing; it appears that, as with crude oil, there will be a growing reliance on imports. Increased U.S. consumption will have to be assisted by imports from Canada and possibly LNG from Africa and the Far East.

Future consumption growth in Europe is even more dependent upon imports. Gas reserves in West Europe are estimated at 25.7 tcf, with consumption currently 9.6 tcf/year. The reserves/production ratio is just 2.7 years.

West Europe's production cannot fill increased gas demand and will have to be augmented by growing imports from the C.I.S. and North Africa.

Current world gas reserves and current production indicate supplies of 68 years.

Excluding OPEC and the C.I.S., remaining world natural gas reserves, at the start of 1993, were 977.4 tcf, and consumption was 41.8 tcf. This represents a reserves/production ratio of 23.4 years. But the efficiency of those reserves to meet energy needs is constrained by location relative to industrial markets.

DRILLING SHIFT

As demand and value of natural gas have increased, there has been a shift toward gas well drilling in the U.S.

At present, almost 50% of active rotary rigs are drilling gas wells. Outside the U.S., much gas production is associated with oil production.

However, as gas demand moves up drilling for unassociated gas will probably increase as it has in the U.S.

This is particularly the case in countries that are major producers or exporters of gas.

Part of the increase that OGJ projects in drilling outside the U.S. and Canada, from an average of 775 active rigs in 1994 to 840 rigs in 1996, is due to expectations for increased gas well drilling.

The drilling will be made necessary by growing gas demand and international trade.

THE OUTLOOK

OGJ expects gas consumption to move up slightly faster than overall energy demand during 1994-96.

Demand will be stimulated by economic growth in the OECD and eventual economic recovery in the C.I.S. and East Europe. The environmental advantages of natural gas will contribute to the demand increase, particularly in the OECD.

Worldwide natural gas consumption will increase 8.6% - from 70.2 tcf in 1993 to 76.2 tcf in 1996.

Only demand for hydroelectric, geothermal, and "other energy" will increase faster than that for natural gas. But all of the major fuels will post significant growth rates, so the gas market share will not increase markedly, moving to 23% in 1996 from 22.8% in 1993.

Gas consumption by OECD countries will rise 8.8% to 38 tcf in 1996. This amounts to a gain of 3.1 tcf.

Natural gas prices will rise but remain competitive with other fuels. This will help stimulate demand for gas, particularly for electrical generation.

The power generation market for gas has been boosted by technological improvements that have improved the efficiency of gas turbines and lowered operating costs.

Increased utility demand is expected for both the U.S. and Europe. Growth is also expected in industrial demand as the pace of economic growth improves. OECD residential and commercial demand will move up as the gas distribution infrastructure is expanded into areas not Vet served.

Increased European demand will require increased imports. This should not be a problem during the forecast period. Longer term, Europe may have to look for supplies from new areas, possibly the Middle East.

The C.I.S. and East Europe are already the most gas-intensive regions of the world. But their huge reserves will support higher demand as the economic transformation takes hold and economic activity increases. Demand in this region in 1996 is projected to be up 5.8% from 1993 at 25.3 tcf. This is an increase of 1.4 tcf.

Natural gas consumption in the developing world is projected to be up 14% in 1996 from the level this year. Gas demand in 1996 is forecast at 12.7 tcf, an increase of 1.6 tcf.

However, the gas share of total developing country energy consumption will not change, as consumption of other forms of energy will also move up sharply over this period. Investment in gas consuming facilities and distribution infrastructure has limited the pace of natural gas expansion in many developing countries. Much of the projected consumption increase will occur in the Middle East, where there are large reserves and production facilities in place.

GROWTH LIKELY

The forecast period should be the start of a period of sustained worldwide growth in natural gas demand that will extend throughout the remainder of the decade.

In the OECD countries, revived economic growth and concern about air emissions associated with energy consumption will help gas demand.

Similar concerns will increase demand in the C.I.S. and East Europe. In that region, the transition to a market structure will begin to stimulate economic growth. In addition, concerns are growing about environmental problems, which are acute in the wake of decades of neglect.

In developing countries, a variety of energy patterns will emerge. There will be significant growth in natural gas demand in areas where supplies are available or in areas that can afford to import gas. In China, however, abundant coal reserves will fuel a large portion of economic growth.

In developing countries with few or no domestic energy supplies, oil will probably dominate energy choices during the next few years. But even with those exceptions the 1990s look very good for the natural gas industry.