Editorial Comment

Sept. 2002 Vol. 223 No. 9  Editorial Comment

Thomas R. Wright, Jr.,  Publisher

Gas outlook is scary. In recent testimony before the U.S. House Subcommittee on Energy and Mineral Resources of the Committee on Resources, Matt Simmons, President of Simmons & Co. International, described the growing natural gas supply imbalance and offered some solutions to correct it. Simmons says that natural gas demand will grow faster than once thought as America increases its electricity use, while supply continues to stay flat. Furthermore, the concept that gas supplies could grow to even partially meet a demand of around 30 Tcf a year is becoming a remote dream. If supply falls by as much as 10%, and the drop could be far worse, this could become America’s most serious energy wake-up call since the 1973 oil shock.

In March 2000, the National Petroleum Council (NPC) issued a report that presented a compelling case as to why gas supplies must grow from 22 Tcf to almost 30 Tcf by 2010. However, the U.S. already has on stream a number of gas-fired power plants that is very close to that which the NPC study assumed would be built by 2010. Simmons says there are almost as many additional gas-fired plants still under construction as have been built thus far, despite cancellations right and left in the wake of Enron and other energy traders’ scandals.

NPC also assumed that a large number of new gas-fired plants would have dual-fuel switching capability, but Simmons says that almost all new plants are being built to use natural gas only. Also, NPC assumed very few gas-fired plant additions in Canada, which has turned out to be incorrect. This combination of assumption errors points to a need for far more gas than the aggressive 30 Tcf by 2010 originally suggested.

Actual gas demand in 2000 was more robust than NPC assumed. Then gas demand began to weaken in the residential, commercial and industrial markets. However, gas used to create electricity grew by 16% between 1999 and 2001, despite a particularly mild summer in 2001 and virtually no severe winter weather in 2001 – 2002.

The weak economy dampened gas demand by a modest degree, but Simmons says that benign weather and the demand destruction caused by $10-gas kept demand from being far higher. Had weather been normal, gas storage would now be facing a severe crisis. Instead, storage became sufficiently full, and, once again, gas prices collapsed. The difference between a storage crisis and storage being "too full" was a modest 5 Bcfd of lesser demand.

If the U.S. experiences a hot, muggy summer in 2002, gas used to create electricity could soar to over 8 Tcf for the year – double the amount used as the 1990s began. Daily U.S. gas production stayed mired at 18 to 19 Tcf per year from 1990 through 1999, despite a steady increase in more gas wells being drilled. During the 2000 – 2001 "drilling boom," U.S. gas completions totaled 15,600 in 2000, almost 60% higher than the prior 7-to-10-year average. But an all-time record was set in 2001, when 22,086 gas wells were completed – almost 2,000 more wells than in 1981. Despite this boom, supply barely grew and little exploration was done. The frenzied development drilling merely kept daily gas supply flat.

By mid-April of this year, working gas rigs had declined by 43% from their third quarter 2001 peak. Gas well completions also have started to decline, even though the reported numbers still reflect higher drilling through the end of last fall. This is simply a lag effect. Simmons thinks that second-half 2002 gas well completions, will likely drop by another 200 to 400 wells per month, taking the completion rate back to levels last seen in early 2000.

The above raises the question of how far gas supplies can fall. To find an answer, Simmons’ firm conducted a supply analysis for 53 Texas counties, which account for 65% of the state’s gas, and which represents 16% of U.S. supply. They measured production results from all wells completed between 1998 and 2001. Of the production from 39,000 individual wells, nearly 30% came from less than 3,000 wells that were completed in 2001. More importantly, a small number of highly prolific wells, amounting to only 5% of new wells drilled in 2001, accounted for almost half of new production.

In the 53-county analysis, 167 giant gas wells were completed in 2001, with an average production life of less than six months. These wells made up almost 15% of the total production coming from 39,000 total wells.

Gas supplies will almost certainly continue to drop. A fall of 10% or more is not a certainty, but the risk is high enough that the U.S. must formulate contingency plans for reacting to such a supply shortfall. Simmons sees the following as possible long-term solutions to this problem:

• The U.S. needs far more Arctic gas than a single pipeline can deliver, plus all the deepwater gas that can be developed.
• Far more LNG infrastructure than currently exists must be developed. After a handful of additional unloading terminals are built, the world’s total LNG capacity will be in balance. Thereafter, the next series of LNG projects will need to include a dedicated gas field, pipeline, liquefaction plant and dedicated LNG vessels. Off-loading terminals cannot be built on the assumption that other components will get developed on a spot-market basis.
• More deep, high-volume gas wells, such as those in south Texas, must be drilled. A far bigger fleet of high-horsepower rigs is essential.
• Extreme gas price volatility must be tamed. No serious business can cope with prices that bounce up and down by a factor of three-to-10 times over the course of a year. Energy traders need convincing that data produced by even the best systems available is not precise, and should not be used like yesterday’s racing forms to place aggressive bets on natural gas.
• Finally, access will need to be extended to all U.S. OCS acreage.

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