Editorial Comment

Jan. 2002 Vol. 223 No. 1  Editorial Comment

Thomas R. Wright, Jr.,  Publisher

Low gas prices could slow 2002 activity. Unless it has turned substantially colder throughout most of North America by the time you read this, 2002 may not be too happy for many of us. The high natural gas prices industry enjoyed 12 months ago have evaporated for several reasons, including the current economic recession, which has been exacerbated by the events of 9/11, unusually warm weather at the end of 2001 and increased gas production capacity, which resulted from last year’s drilling boom.

And although oil prices have remained at levels high enough to allow economic development of oil resources, the degree that industry’s health now depends upon gas has been clearly indicated by recent declines in drilling activity. Since upwards of 80% of North American drilling is targeted for gas, any decline in gas drilling is readily apparent.

One of the first hints that 2002 may be a poor year for drilling came recently from the Canadian Association of Drilling Contractors when it released its forecast for this year. CAODC sees average Western Canadian rig utilization running only 45% for 2002, compared with a 64% utilization rate just last year. But the news is not all bad – this utilization equates to an average of 405 rigs running during the year, which is higher than any year since 1996. The bad news is that the drilling business has expanded to meet past demand, and thus, many of those new rigs will go without work.

CAODC has also forecast that 13,600 wells will be drilled throughout the country this year, a significant decline from the record 17,300 wells it says were drilled in 2001. Similarly, the Petroleum Services Association of Canada is forecasting a 20% decline in drilling to around 14,400 wells in 2002. PSAC chairman Bill Lingard calls this "a moderate slowdown, not a crash by any means."

Meanwhile, the Texas Alliance of Energy Producers is hinting at a return of the "gas bubble." The group notes that more than 100 MMcfd of gas has been shut-in in the Fort Worth basin by TXU Lone Star Pipeline since November. The alliance cites several reasons for the curtailments, including the shut-down of an NGL line for maintenance, reduced demand for gas in the Dallas-Fort Worth metroplex, lower demand for electricity, full storage and a limited ability to unload gas to other areas.

The rest of the U.S. is no better, with the number of active rigs down nearly 15% from a year ago. However, of the 928 rigs running as this was written, almost 83% were targeting natural gas, compared to 78% drilling for gas during the same period in 2000.

The effect of current gas prices on this year’s drilling activity has yet to be determined, but World Oil’s editors are well into the preparation of their annual forecast (look for it in next month’s issue). At this point, expect a slower first half as operators await stronger gas prices, even though the conventional wisdom calls for ever-tightening gas supplies, and ultimately, higher prices.

On a related note, the American Gas Association will cease to report weekly gas storage figures at the end of this year. Henceforth, the Energy Information Administration of the U.S. Department of Energy will take over those duties. Although this could eliminate the problem of incomplete figures being used by the gas market gamblers (AGA uses a voluntary sampling system), it could lead to a completely different picture of the supply situation. Let’s hope we don’t see EIA overstating its storage figures like it did for gas reserve additions when it took over that job.

When gas prices rise, drill your own wells. Because of high natural gas prices, a school system near Pittsburgh has decided to develop its own gas resources. The school board in Penn Hills, in the heart of Pennsylvania coal country, has signed with Penneco Oil Co. to drill as many as 10 natural gas wells on the district’s property. The school system would get a 12.5% royalty, plus a fixed share of the gas – not enough to supply all of its energy needs, but enough to cut its heating costs in half and delay a tax increase, officials said. Last school year, it cost $450,000 to heat the schools, in part because of gas prices almost six times higher than normal.

Other schools around the country and in Pennsylvania have leased drilling rights over the years, and this could signal a resurgence in the practice. But don’t bet your pension on it happening in California or Florida.

Grass to electricity? When we first heard about this project, we obviously had to wonder what kind of grass was being burned and whether the proponents were already inhaling the smoke. However, according to a recent PRNewswire report, the project is legitimate (but not necessarily a winner).

It seems that John Deere equipment and technical support will help start a groundbreaking project in central Iowa that aims to turn common switchgrass into electricity. More than 80 farmers managing 7,000 acres are working with the project. Switchgrass is a common prairie grass grown on marginal farmland throughout many parts of North America.

Alliant Energy is testing small amounts of the switchgrass at its Ottumwa generating station in Chillicothe, Iowa, which is co-owned with MidAmerican Energy. If the project reaches its goal, 5% of the fuel burned at the generating station will be switchgrass, eventually adding up to 200,000 tons burned annually at the site.

Obviously, you won’t be surprised to learn that the Chariton Valley Biomass Project is a cooperative effort of government agencies and private sources, and is managed by the Chariton Valley Resource Conservation & Development, Inc., Centerville, Iowa, which is a non-profit corporation focused on helping Southern Iowa farmers. Martin Braster, project coordinator for the Chariton Valley Biomass Project, said, "This renewable energy source will offer every coal-fired generating station a good alternative as governmental policy concerning green fuel changes and as coal gets more expensive to produce."

John Deere self-propelled windrowers and square balers harvested the switchgrass used in the experimental phase, and John Deere’s Ottumwa Works personnel developed the expertise on how and when to best cut and store the annual crop. Braster says the preliminary results are very positive, and that, "The switchgrass mixture produces less greenhouse emissions (Do you wonder if he can prove that?) and is a good renewable source of energy." The National Renewable Energy Laboratory will issue the official test results later this year. Bet your pension that they will be positive.

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