WASHINGTON, D.C., Oct. 8, 2004 — The United States is facing a critical five-year period in which, unless new steps are taken by consumers, industry and government, there is significantly increased risk of higher, more volatile natural gas and electric power prices, job losses, demand destruction and industry relocations, Cambridge Energy Research Associates (CERA) Chairman Dr. Daniel Yergin said in testimony to the Joint Economic Committee of the U.S. Congress.
“It is clear that, without measures to boost supplies or temper demand, the market is locked in a strong price environment,” Yergin said. “Natural gas prices today have spiked to triple the average of the 1990s, and that is signaling what is ahead.”
“The challenge lies between now and the arrival of substantial new volumes of LNG on North American shores,” he said. “This is a multi-year period when CERA expects that a tightening of the balance between supply and demand could lead to even higher and more volatile prices for the continent. An event as simple as an abnormally hot summer or cold winter could push prices well above recent levels, to the $6.50 to $8 per MMBtu range in the summer, and above $10 per MMBtu during a particularly cold winter,” he added. “This is exactly what Hurricane Ivan has done.”
A range of measures are available, according to Yergin, to enable the U.S. to manage natural gas demand and exposure to price volatility during the bridge period of 2004 to 2009, including:
“- Effective customer education and flexible gas procurement mechanisms by utilities;
“- Fuel flexibility for new and existing electric power capacity;
“- Resolution of the mismatch between the short-term contracting bias of consumers and the need for longer-term commitments to underpin new natural gas infrastructure, such as Arctic and LNG supplies; and
“- Acceleration of gas production in the near term by streamlining
permitting for activity and applying flexibility.
“The challenge is before the industry and regulators and policymakers — and indeed the nation — to manage a difficult market environment over the next few years while new supply arrangements can be made. Critical decisions, some implemented for just a few years, could provide some real relief for consumers in the coming few years and ensure natural gas’ deserved place as a fuel for economic growth and environmental quality,” Yergin concluded.
Comparison of the U.S. natural gas demand imperative with the supply outlook creates a stark picture, according to Yergin. Demand is set to continue to outstrip continental supply, and the gap is on track to widen.
“The reason we are in a crisis is not that demand has surged, it is that supplies are stagnant,” Yergin noted. “In the Lower 49 United States, we have not been able to increase gas production for a decade.” Productive capacity peaked at 55 billion cubic feet (Bcf) per day in 1994, and has been creeping ever downward, now standing at 50 Bcf per day. In recent years, Canada has become a major source of natural gas, supplying 16% of current U.S. consumption. However, Canadian production has flattened in recent years, and CERA expects only modest growth in Canadian production over the next several years which, combined with growing Canadian demand, translates into declining exports to the U.S.
“There is strong evidence that simply adding more drilling rigs will not solve the problem, as it has in previous decades,” Yergin said. He cited the experience of 2001 when the gas industry responded to wintertime price spikes by putting over 1,000 rigs to work, compared with 700 rigs the previous year. This surge in activity yielded less than a 4% increase in U.S. production, which eroded the following year. In 2004, onshore drilling has returned to record levels, but CERA expects U.S. gas productive capacity to fall from 2003 levels. “North American natural gas productive capacity is not expected to grow meaningfully, and U.S. gas productive capacity, like oil, is now in permanent decline,” he observed.
At the same time, North America is set for a large increase in gas demand to fire electric power plants. In recent years, almost 200,000 megawatts of gas-fired power plants have been installed, equal to one-fourth of the country’s total installed capacity in 2000. With these plants in place, demand for natural gas will grow steadily as economic growth inevitably pushes their usage higher. “With supplies unable to grow in the near term, power demand is squeezing price-sensitive industrial demand out of the market, with negative consequences for competition and employment in gas-intensive industries in the U.S. and Canada,” Yergin testified.
He identified key industries already hard hit by the higher natural gas prices as the ammonia-based fertilizer industry, petrochemical industry, pulp and paper, primary metals such as steel, and other sectors that depend on natural gas. “Unfortunately, CERA expects that natural gas demand growth in the power sector will come at the expense of more constrained industrial sector consumption – what is described as ‘demand destruction.’ Indeed, industrial consumers are already examining off-shore locations for new plants,” Yergin said.
“By contrast, many parts of the world are awash with gas,” he noted, and “outside North America global natural gas reserves are growing. Projects are now underway to bring these new global resources to North America in the form of liquefied natural gas (LNG). And there are huge quantities of stranded gas in Alaska, and gas as well in the Canadian Arctic.”
Yergin predicted that the bulk of North American supplies in the next decade and a half will come from continued exploration and production in North America, with LNG playing an important role as the third major supply source after the U.S. and Canada. “Today LNG provides 3% of U.S. supplies. By the year 2020, that share could be 25% to 30%,” he said.
However, according to Yergin, the problem is that developing LNG supplies, as well as Arctic gas, requires long lead-time projects. CERA estimates that the soonest LNG could provide significant price relief is 2008, with 2009 a more likely date. In addition, gas from the Canadian Arctic could reach the market by 2010, and Alaskan gas will not arrive until well into the next decade.
“Natural gas is critical to the American economy. It provides almost a quarter of the total energy on which our economy runs. Yet, seemingly overnight, at least in the public’s perception, natural gas has shifted from the ‘fuel of choice’ in North America to the ‘fuel of risk’ – from a plentiful, relatively inexpensive fuel to one marked by uncertainty, volatility and record price levels.”
“With upward pressure from demand, prices are performing their essential function – signaling the change in conditions to both producers and consumers. Prices for the next three to four years are
expected by CERA to exceed $5.00 per MMBtu, more than double the levels of just a few years ago. These prices are adding to the burdens of consumers and shifting the competitiveness of key industries that depend on natural gas. Yet it is important to understand that producers have
limited ability to significantly increase gas production in the near term without access to new sources and new areas,” Yergin testified.
Cambridge Energy Research Associates (CERA), a subsidiary of HIS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, Massachusetts, and has offices in Beijing; Calgary;
Mexico City; Moscow; Oakland, California; Oslo; Paris; SÃ£o Paolo; and Washington, DC.