July 1998 Vol. 219 No. 7  Production

Robert E. Snyder,  Editor

North American gas saving the day

On May 27, Arthur Andersen and Cambridge Energy Research Associates announced the release of its North American Natural Gas Trends joint study. The principal message in the report is, now that the natural gas industry has a market, it must develop the supply capability.

The Trends authors say, "The gas industry has recaptured important competitive advantages in the marketplace. This is a golden opportunity, but with it comes the challenge of developing adequate resources and infrastructure to meet a 25 or even 30 Tcf/yr market in the U.S. over the next decade. How this challenge is addressed will shape the new millennium for the gas industry in North America."

Trends identifies five areas in which the gas industry must make significant progress to achieve its growth potential:

1. Responding to volatile demand growth driven by greater use of gas in electric power, particularly for meeting peak power demand. More than 30,000 MW of new power plant additions are planned over the next four years; this is already adding a second "summer" peak to demand.
2. Finding and developing new reserves to meet growing demand.
3. Building new infrastructure to access existing supply areas and connect new areas such as the deepwater Gulf, Atlantic Canada and possibly the Arctic. New infrastructure will be required to access growing markets where gas has had a low penetration, such as the U.S. Northeast and Southeast.
4. Restructuring the customer interface to reach the retail level.
5. Managing convergence with electric power in the growing use of gas in power generation.

Total North American gas consumption grew nearly 3% annually in the past decade, increasing from 19.9 Tcf in 1987, to 25.8 Tcf in 1997. The U.S. accounts for 85% of total consumption in North America.

Consumption has increased 57% in the industrial sector since 1986, driven by industrial power generation, and growth of manufacturing output. Responding to this, North American production increased to 26.2 Tcf in 1997, from 20.2 Tcf ten years earlier, with the help of increased E&D spending and new technologies. Canada contributed nearly half of this increase, and has more than doubled its annual production to 5.6 Tcf.

In the U.S., the rate of production has become more consistent throughout the year to support rising use of gas for power generation for peak summer demand, with the typical seasonal drop in production falling from 4.8 Bcfd in 1987, to about 1 Bcfd in 1997.

But gas reserves have not risen with production, Trends says, as industry more efficiently deployed its proven reserve base and sustained production growth with a reserves-to-production ratio that is now less than 11.3 in North America, down from 17.7 in 1987; and 8.0 in the U.S. Lower-48, down from 9.8 a decade earlier.

For gas prices, Trends says that, as demand pressure continues to strain productive capacity, prices have become more volatile and generally higher. Henry Hub prices rose to an average $2.65 per MMBtu between 1996 and 1997, compared with $1.78 between 1990 and 1995. Only in Western Canada have prices remained low, due to persistent pipeline capacity constraints.

Greater competition among pipelines and the rise of wholesale marketing has put downward pressure on revenue differentials between wellhead and citygate. Downstream of the citygate, some end users have seen higher burner-tip prices and distribution costs, but even these have generally been less than the inflation rate.

Natural Gas Trends is available for purchase from Arthur Andersen in Houston. Contact Ms. Mickey Appel at Tel: 713 237 2472, or Fax: 713 237 5673.

Gas drilling not keeping up. In another analysis, which has some important data and conclusions about the U.S. gas industry, Prudential Securities’ Natural Gas Drilling Outlook of May 20, asks the metaphorical question, "Is the U.S. putting enough straws in the ground."

Everyone agrees that natural gas prices are saving the U.S. industry through this period of "temporarily" low crude prices; the Prudential report puts some quantification to that belief. It says the importance of gas wellhead revenues to domestic drilling activity is critical.

U.S. gas production in 1997 of nearly 19.0 Tcf at an average wellhead price of $2.45 equated to $46 billion of aggregate wellhead revenue before royalties, severance taxes, and lifting costs. In comparison, domestic oil production in the Lower-48 generated about $30 billion — and oil prices were higher last year.

Since gas represents more than 60% of the equivalent production of most U.S. independent companies, the trend in gas prices is a primary factor affecting cash flows, discretionary spending and drilling activity.

The report says the volume of gas produced in the U.S. in 1997 was higher than at any time since 1981. This was achieved despite the fact that proven reserves have been generally declining since the late 1960s, with annual reserve additions from adjustments, revisions and discoveries less than the rate of production. This level of domestic production has been generated with about 50% of the active rigs and successful completions of the early 1980s.

However, Prudential believes that gas reservoirs are being depleted much more rapidly, and the average size of newly discovered reservoirs contain less potentially recoverable reserves. Thus, with gas drilling at the highest level in many years, the production response has been quite "limited."

In summary, Prudential believes the outlook for gas prices in the U.S. will remain reasonably positive over the next several years, primarily because: 1) demand growth should improve consistently, averaging 2% – 3% annually; 2) incremental sources of supply from deep water, and Canadian imports, may not increase that rapidly; and 3) production decline rates from existing fields, especially in the shallow Gulf of Mexico, are accelerating.

For more information on Prudential’s report, contact J. R. Freedman, Tel: 212 778 1446, or M. D. Conlan, Tel: 713 650 4794.

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