EXECUTIVE Q&A: Outlook for gas producers

OGJ Online Energy Policies Editor Patrick Crow interviewed R. Skip Horvath, Natural Gas Supply Association president, in Washington, DC, last month. Horvath outlined the challenges facing his association and the gas industry.

The Natural Gas Supply Association represents most US gas producers. Its mission is to pursue regulatory and legislative issues that foster a growing and competitive natural gas environment, while at the same time improving members� business operations.

OGJ Online Energy Policies Editor Patrick Crow interviewed R. Skip Horvath, the Natural Gas Supply Association president, last month in Washington, DC, where Horvath outlined the challenges facing his association and the gas industry.

OGJ Online: The big question of the day is US supply-demand for next winter. Will there be a shortage of natural gas?

Horvath: This winter is going to be, according to the National Weather Service, normally cold. We�ve had a series of warmer-than-normal winters. And as a result, we are seeing a tightening of supply. Let�s get the bad news on the table first: Prices will be higher for consumers this winter. The good news is that there will be adequate supply. What the higher prices do is draw in thousands and thousands of producers to deliver gas to consumers, competing with each other to get that product to the market.

OGJ Online: What about reports of gas storage being low for this time of year?

Horvath: I am a big supporter of our industry�s ability to get storage in the ground in an appropriate manner. I disagree with prognosticators who say that we don�t have enough gas stored. It looks to me like we�re right on target. If you look at 5 or 6-year averages, we�re squarely in the middle [of the range]. If you separate the production side of storage, that is storage in the Southwest, from the market side on the West Coast and in the Midwest, you�ll see we are above target in those storage fields. That�s a little known fact.

On the market side we�re above target, and that is the part that�s used to bring out and satisfy peak demand. The production storage is not used for peak demand and is not as important a measure, and yet it is included in all the numbers I�ve seen so far.

OGJ Online: What if the winter is colder than normal?

Horvath: Even so, when folks prepare for the winter, they don�t prepare for what�s coming but for a little bit worse, in their contingency plan. So their actual planning is always for a worse winter than you expect. That�s just a normal part of doing business in the gas industry.

OGJ Online: What will prices be like?

Horvath: For antitrust reasons, we have no idea. But common sense tells you that nobody knows. Anybody who tells you what prices will be is just guessing. What some folks will tell you is that, because prices have roughly doubled this year at the wellhead compared with last year at this time, the gas coming out of the ground that was put in the ground at this higher price will come out at the higher price. So we know an increase of that magnitude can be expected. The numbers I�ve seen indicate that translates into anything from a 10% to 50% increase at the consumer end.

OGJ Online: What is industry doing in response to these higher prices?

Horvath: First of all, we are running flat out. Every available producer that can be attracted to the market by these kinds of prices is there. The number of rigs has more than doubled. April of 1999 was the low point for drilling rigs. At last count they were 772 rigs working, more than twice what they were a year ago. That�s an incredible increase. So we�re doing everything we can to get the gas out. We�re producing gas flat out both onshore and offshore.

OGJ Online: Were does the US get its gas supplies?

Horvath: The US draws 87% from its own supply, with the rest from Canada, and a fraction of a percent from Algeria and Venezuela in the form of liquefied natural gas. We could also possibly see some LNG from Alaska in the future, if the supply-demand trends continue. Most domestic supply is from the Gulf of Mexico, both onshore and offshore.

We do have serious constraints on access to federal lands. Much of the Rocky Mountain region, the eastern part of the Gulf of Mexico, and most of the offshore on both the East and West Coasts is off-limits to exploration drilling. If the country wants to relieve the price pressure, it needs to bite the bullet on land access.

OGJ Online: Are Gulf of Mexico fields being depleted more rapidly than expected?

Horvath: It�s true that they�re being depleted faster than they were. That�s a clear fact of geology. But it�s not faster than anybody expected. Pulling gas out of the ground is not an unknown science. We�ve been doing it for 100 years. I think the surprise was for many people who haven�t paid attention to production. Maybe industry hasn�t gotten our story out well enough. The current price environment may be an opportunity to do that. The fact is that the improved technology we have today allows us to pull gas out of smaller fields faster, and they have higher decline rates. It�s not a bad thing; it�s a good thing. It�s not an indication of a lack of supply at all.

OGJ Online: What will these higher prices do to rejuvenate the industry?

Horvath: First of all, they will allow us to focus more on research and development. They will allow us to fund scholarships to schools to get more petroleum engineers, since enrollment is at an all-time low. Higher prices generally do rejuvenate the industry. They allow us to pay higher salaries to those who left our industry because prices were low; they allows us to attract them back with higher salaries. The money does seem to be going toward reinvestment in our own infrastructure, which has been neglected.

OGJ Online: Is gas drilling restrained by equipment shortages yet?

Horvath: A little bit. The 772 rigs working now are more rigs than people estimated were available. That means that people are cannibalizing old rigs for parts to get more rigs in operation. At the same time, new rigs are being built. The more critical problem is the people shortage. Labor is tight in this country due to the booming economy.

OGJ Online: The Natural Gas Council recently held a summit in Colorado Springs so that gas companies and their customers could discuss supply issues. Was the potential of a shortage discussed?

Horvath: We do not subscribe to the shortage theory at all. To the extent that we heard supply concerns at the meeting, the 70 gas company executives there addressed those issues adequately. I think they put to rest the notion of shortages.

To me, a shortage means that someone is willing to pay for gas but can�t get it. I just don�t see that happening this winter. That doesn�t mean people won�t have service interrupted, but they�ve paid a lower price so that they can be interrupted. People who have firm contracts for natural gas will get it this winter.

The meeting was called because we had never sat down and listened to our customers before as a group. We had done it individually. And we got an earful at Colorado Springs. We haven't made public any of the findings yet, but it was considered a big success by all who attended. It was a first-time effort, and we expect there will be some need for follow-through.

OGJ Online: There�s appears to be more cooperation between the producing, pipeline, and utility segments of the gas industry than ever before. Is that true, and if so, why?

Horvath: I think the relationships between the sectors has never been better. I only go back 20 years in the industry, but this is the best it�s been. There is a lot of cooperation. We are working together to serve our customers this winter.

I think we now have a group of executives in the industry, the CEOs of the various companies�distribution, pipeline and producing�who are willing to work together more and put aside their struggles. We�re still going to argue [with each other] before regulatory bodies and the courts. That�s never going to go away. That�s the kind of society we have. But we know that the better good is for our customers to get gas, and we�re never going to let our disagreements get in the way of that.

I think unbundling of prices has allowed each segment of the industry to focus on what they do best. We�ve all accepted our roles now, and that acceptance has permeated the industry.

OGJ Online: Will the US gas industry be able to supply the projected 30 tcf market in 10-15 years?

Horvath: I believe that any number you pick is going to be wrong, so I don�t subscribe to the 30 tcf number. I subscribe to a strong demand projection for the future. The industry will be able to supply whatever that market is going to demand, whether 28 or 32 tcf, at the price that the market dictates at the time.

Long linear projections of the kind that we are seeing now remind me of the kind we saw in the 1970s when there were predictions for $100/bbl oil. Long-term projections have always been wrong. Some of the current studies assume that the booming economic trends will continue. That�s unlikely. An economic slowdown in general will mean a slowdown in the gas industry, so we will have to moderate those projections a bit.

Skip Horvath has an undergraduate degree in aeronautical engineering from the University of Notre Dame and a masters degree in public policy from the University of California at Berkeley. After working on the space shuttle for the National Aeronautics and Space Administration, he completed his military service and then joined Rand Corp. to work on national defense and energy issues. From there, Horvath joined the Interstate Natural Gas Association of America, where he eventually became CEO. He was named NGSA president in August 1999.

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