Expectations of Impending Natural Gas Crisis Are Overstated

Abstract: Two recent developments suggest that expanding media coverage of an impending natural gas catastrophe may make stimulating reading, but don't bet the house on doomsday scenarios.

Analysis: Those soaring trumpet sounds may very well be the natural gas cavalry coming to the rescue.

That cavalry is riding in from two directions--one short-term, the other longer-term in nature. The former should get here before summer ends. The latter is still beyond the horizon, but indisputably on the way.

The existence of both has been obscured over the last few weeks by the latest development in energy: the marriage of the terms "natural gas" and "crisis" in the major media. Or, just type "natural gas crisis" on your internet search engine.

Then duck.

The opinions encountered are valid, of course, but it would be a mistake to discount the adaptability of the oil and gas industry to respond to market signals.

The industry response to high natural gas prices since the first of the year has been phenomenal in terms of rig count. The story is now spreading to natural gas injection. The month of June witnessed multiple consecutive weeks where storage injections exceeded 100 Bcf per week.

In fact, one week witnessed a net injection of 127 Bcf, which set an all-time record in the nine years the U.S. Department of Energy has been compiling data.

If these trends continue, the nation will end storage injection season right about average at 3.1 Tcf. Considering that projections just 90 days ago speculated it would be difficult to reach 2.4 Tcf by next winter--well, chalk the current progress up to the quiet competence of the hard-working men and women in the oil and gas industry.

The industry ended winter storage with a record low 623 Bcf in the ground. In just six weeks, the industry added 665 Bcf to storage. Even if gas injections drop back below 90 Bcf per week, the industry still at will hit 3.1 Tcf on October 31.

It is not hard to identify the reason.

Imagine all the 24/7 activity of the heroic worker bees working day-in-and-day-out 12-hour tours on drilling rigs in East Texas, South Texas, the Rockies, or western Oklahoma. What looked like a sure thing--a major storage shortfall heading into the winter of 2003-04--is now quietly devolving towards business as usual.

Indeed, the emerging news at the moment is worry on Wall Street that the energy story has played out for the time being because of high rig counts and unprecedented storage refill volumes.

Similarly, the second trumpet call, like the first, has gone virtually unnoticed.

On June 18, TransCanada announced an agreement with the Aboriginal Pipeline Group, a consortium of Native Canadian peoples, providing partnership interests in a pipeline tying gas generated from the Mackenzie Delta into the western Canadian pipeline grid.

This breakthrough means an application to build the first pipeline to transfer stranded Arctic gas to lower North America will be on regulators' desks early next year. The process will begin with three years of studies and public hearings before the 800-mile, $C4 billion pipeline is built. The agreement overcomes 30 years of complex legal hurdles that had previously created opposition to any project by aboriginal Canadians.

While no one can predict with certainty what will evolve out of attempts to craft a national energy policy in the United States, odds are that it will include some combination of loan guarantees, incentives, or other legislative mechanisms to lessen risk for companies interested in building a rival gas pipeline to the Alaskan North Slope.

First flow in the Canadian pipeline is a half-decade distant. First flow in the Alaskan pipeline is probably a decade distant.

The Mackenzie Delta pipeline is now on its way to being built.

Meanwhile, that growing drumbeat in the background is the expanding discussion on LNG. This, too, is moving from the realm of barely discernable reality to concrete proposals. When the Covepoint, Maryland LNG facility re-opens in July, it will be a small but symbolically important step in easing the infrastructure constraints that have kept LNG at one to two percent of U.S. gas supply. Ultimately LNG could draw on abundant resources worldwide and supply up to 80 Bcf per week within three years, according to Thomas Driscoll, an analyst with Lehman Brothers.

The gas crisis claim boils down to two themes. The first is an impending gas deliverability shortage by winter 2003-04.

The second is trying to increase production to meet expanded natural gas growth targets of 50 percent or more sometime between 2010 and 2020.

As for the first, the odds of an impending winter natural gas crisis are diminishing by the week thanks to high rig counts, mild weather, and a futures strip that rewards E&P companies for generating gas and putting it into storage.

As for the second, the 30 Tcf economy is a flawed model, based on straight line interpolation of trends in the late 1990s. Think of it as the energy industry's equivalent to projections that the Dow Jones Industrial Average will top 30,000.

If one defines natural gas crisis as an inability to produce massive amounts of $2 gas, the crisis is real, and it is here to stay. North America is prospect-poor when it comes to $2 gas. As the current escalation in drilling activity demonstrates, however, there are more than adequate prospects of gas at $3, $4, or $5 per Mcf.

At between $4 and $5 per Mcf, the economics justify pipelines to the Arctic, nuclear power plants (at least on an economic basis), and LNG.

It is possible to envision a doomsday scenario in which enough things go wrong at the exact worst time to create a gas deliverability crisis. Heat waves of biblical proportions could suddenly materialize, creating gas-on-gas competition in the marketplace, sending prices soaring as rolling blackouts blanket major population centers.

But don't lose any sleep over such visions.

There may, in fact, be several worries in front of the U.S. population this July 4th. Will the brisket be done on time? Will the first patriotic fireworks display in the post-Iraq era get rained out?

But one thing you won't have to worry about is an impeding natural gas crisis. The oil and gas industry is hard at work far from the headlines doing the things that will prevent that from happening. That work is paying off so far. If you see an energy industry employee this weekend, offer a congenial "hello" and maybe a slice of that brisket. The employee wouldn't have it any other way.

And enjoy your 4th.


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