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Natural gas fails to meet expectations.

Promises, promises, promises! In year 2000, natural gas was the promised energy source for the for the new century. Natural gas was the "bridge fuel" of the new era. Supplies were more than plentiful with little reason to seek foreign sources to meet the growing demand. Domestic areas would provide new exploration targets and gas supply would easily meet the increased demand. And, consumption was going to grow, especially for use as a fuel in electric generation.

Natural gas demand had risen from the low 20 trillion cubic feet per year (Tcf/y) and was moving up as the century ended. Expectations were that demand would reach 30 Tcf/y by 2010, maybe even faster, depending on who was making the prediction. Gas prices, because of the abundant supply, were low and would remain low especially in comparison to crude oil products. Natural gas was king!

There were additional "goodies" just for the asking for increasing supply. Reserves were considered strong in the northern Canadian and Alaskan areas. Plans for pipelines to bring this gas to the lower 48 were considered since the mid-1960s and with the increased demand, building the pipeline and bringing the gas down was a sure thing. Further, there were many areas in the U.S. where large potential reserves were untapped. Also, new technologies in liquefied natural gas (LNG) were changing that industry. It made it possible to get gas from the large isolated pools available in Africa, South America and other regions. LNG would easily make up for any shortages the fast-growing demand might cause. Around the turn of the century, well over 30 LNG projects were on the drawing boards, ready for the word "go".

Remember--promises are only promises! As 2004 draws to a close, where are the results of the high-flying, exponential growth in the natural gas industry? Not that the business is bad--maybe it is the best it has been in the last 10 years, but still not with the growth and greatness expected in 2000. Pricing is an entirely different stow; new supplies and building new facilities for bringing new quantities to the U.S. have not materialized. Drilling in the new potential domestic basins remains a no-no. Demand has not taken off and has even declined in recent years because of the high prices and perceived short supplies of gas. It is not the picture that was painted in 2000!

Because supply, demand, and prices are so interwoven, it is hard to pick the starting point on why the industry is where it is today. Prices are maybe the best indicator of the industry's condition, so that makes a good starting point. In late 2000, natural gas prices began to rise based on the increased demand and perceived supply limitations. That was the peak year for gas demand in the U.S. as it reached 23.9 Tcf, almost a 4% increase over the prior year. Prices, based on Henry Hub cash transactions, moved up in 2000 almost 100%, from $2.14 to $4.23/MMBtu. Figure 1 compares prices and gas demand for the five-year period from 1999 to today on a monthly basis. The accompanying table summarizes, on an annual basis, prices and demand.

Gas prices moderated alter spiking in late 2000, early 2001 (the average monthly price for January Henry Hub cash trades was an astonishing $9.13/MMBtu) and saw a considerably lower average for 2001 and even lower in 2002. Still, the signs were that gas prices would be highly volatile and go up before going down. In 2003, prices were $5.63/MMBtu. The days of low-cost gas seem gone forever. Even Alan Greenspan, the head of the Federal Reserve, noted how the days of $2/MMBtu gas were history.

The potential shortage of gas as evidenced by the tremendous drawdown on storage seen in the 2002-03 heating season and the lack of a significant increase in gas production in the U.S. in recent years, even with high prices, are considered the reasons for the high prices and volatility. At the end of the century, everyone saw ample gas and the potential for additional supplies coming from northern sources in Canada and Alaska, LNG imports, and new field developments. This has not been the case and now the nation's ability to meet demand is in question.

While supplies were ample in the 2003-04 heating season and the outlook for the 2004-05 is good, there is still the nagging perception that the U.S. is running out of natural gas. Canadian imports have dropped in the last few years. The development of LNG facilities is much slower than expected. Although imports have doubled in recent years, this only adds a percent or so to gas supply. No new domestic areas are available. A real good feeling on supply is just not there!

The high prices, especially the volatility, have affected gas demand in the past year. Yes, the weather and the economy have played a role and while it is hard to measure the precise impact of high prices, that has played a key role in where demand is today--down. Some industries have had to curtail production because of high gas prices. Currently, there are some forecasters predicting gas prices this year could come close to $10/MMBtu if there is a cold winter and the economy continues to improve.

Demand is the driving force of the industry. There is limited storage capability in the U.S. for natural gas, about 15% of current annual demand. If storage is filling according to schedule, then the impetus for additional supply, whether from production or imports, is demand. For the first seven months of 2004, demand is lagging slightly behind last year, down about 0.3%. While there was a very slight increase in production in 2003 over 2002, current data show a slight decline this year. Net imports are up slightly, less than 1%. Supply does not show a potentially significant increase which also plays a role in higher prices and volatility.

There appears to be no quick fix to increasing supply. Certain areas of the nation remain off-limits to new drilling. Bringing gas from the north--Alaska or northern Canada--is still a decade away and even LNG development is much slower than expected. No one wants a LNG facility in his or her backyard. Of the over 30 proposed projects mentioned earlier, less than 10% have moved along in any reasonable fashion. Supply vulnerability will plague the industry, if not in reality, at least in perception.

Where does all this leave natural gas as the fuel of the future? Are the promises at the turn of the century still good? It is the clean, efficient fuel and should be the fuel of choice for a great many applications, just not as cheap as it was previously. Currently, it supplies about 27% of the total fossil fuels used in the U.S. Growth, if increased supply is possible at good economics, appears positive for both the industrial sector and electric generation. Trying to replace natural gas would put an unbearable increased burden on crude products, coal and even nuclear. Natural gas is still very important thought the shine is a little dimmer.

The "baggage," meaning the insecurities it carries, has an effect. Nuclear is getting another look. New technology to build better facilities and handle spent fuels may create a renaissance in nuclear power generation. Electric generation will continue to grow as the economy improves, the population grows, and consumers buy more labor-saving or convenience items. Dirty old coal, which still supplies about 27% of the fossil fuel energy coming in the U.S., is getting a new look as well.

Mine-mouth electric generation and the availability of new technology to clean coal-fired power plants are hot subjects today. The capital costs of coal appear more favorable against the rising costs of natural gas. Necessity is the mother of invention and the volatility of gas prices for whatever reasons is enough necessity to look for other sources of fuels for the future.
Table 1:
U.S. Natural Gas Demand, Price 1999-2003

 Demand Price
 Quad BTU $/MMBtu

1999 23.010 2.14
2000 23.916 4.23
2001 22.861 4.07
2002 23.639 3.33
2003 22.452 5.63

Carol Freedenthal is a frequent contributor to Pipeline & Gas Journal He can be reached at
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Title Annotation:From The Burner Tip
Comment:Natural gas fails to meet expectations.(From The Burner Tip)
Author:Freedenthal, Carol
Publication:Pipeline & Gas Journal
Geographic Code:1USA
Date:Nov 1, 2004
Previous Article:Upcoming events 2004.
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