Why Everything You Know About Natural Gas Companies Is A Lie
The North American gas industry is along the way of reinventing itself. Only recently, it was a land-locked business that had to sell aggressively to discover customers for its plentiful fuel. It is increasingly being a global business that can continue to push itself to meet burgeoning demand. But this really is no quick fix; it will take years because of this transformation to be completed.
What a turnaround. Just 10 years ago, the gas industry was entering the second decade of a supply surplus colloquially described as the "Gas Bubble." Oversupply meant chronically low prices. The cost of delivered gas fell 42 percent in real terms from the mid 1980s to the mid 1990s--to $1.72 per thousand cubic feet by 1995--even although consumption had grown by 30% during that period.
These affordable prices put the industry into survival mode. In those times, producers who drilled a dry hole would claim that the bad news was that they did not find oil, however the great news was that they didn't find gas.
The late 1990s brought a series of changes that began the industry's transformation. Gas started to end up being the fuel of choice in electric generation. Improved turbine technology increased the efficiency of gas-fired electric power stations, which were also cheaper to build and--because of the environmental advantages of gas--easier to get approved than power stations that used other fuels. At the same time, gas was low-cost and plentiful. In the climate, Diigo explains the electric power industry embarked on a significant building campaign, ultimately adding over 200 gigawatts of new gas-fired electric generating capacity, a twenty-five percent jump altogether power capacity. But underlying this was a crucial assumption that gas would remain cheap and plentiful. More homes and businesses turned to gas for heating and cooking, as well.
Nonetheless, even as the construction boom was in full swing, the supply side of the area began to undergo a dramatic change. By the late 1990s, 10 years of steadily rising production had whittled away the overhang of capacity. Supply, which had been chronically in surplus, was now just in balance with demand. Mild winters in 1997-98 and 1998-99 forestalled the inevitable price adjustment. But in 2000, a hot summer triggered surging prices nationwide and exacerbated a power crisis in California. Since then, the market has continued to tighten and prices have generally risen, reaching $8.80 per thousand cubic feet in hurricane-ravaged 2005, more than five times the cost of ten years earlier. Over a year of benign weather allowed prices to help ease to about $7.00 in early 2007--still well over the levels of the 1990s. With the recent cold weather, they have bounced back.
Why have prices risen so much over the past decade? You will discover two reasons. On the supply side, it's geology. And on the demand side, it's the growing significance of gas-fired power generation.
Since 1999, drilling activity in the United States has risen more than 300 percent. Regardless of this, production has remained flat. This perplexing result is rooted within the maturity of the gas resource base in North America. Although gas remains available and new fields are continually being identified and developed, many of these deposits are deeper, smaller, embedded in harder rock from which gas is more tough to extract or far from the pipelines that will carry the gas to market. These much harder deposits are also more costly to produce, which puts a squeeze on project profitability, even with higher fuel prices. Along with that, costs of the services used to seek out and develop new fields have risen substantially.
While production stays flat, demand is poised to continue growing--primarily because increasing consumption in the power sector is virtually locked in. Much of the recently installed gas-fired generation is utilized at low rates today. But most of the non-gas power stations are operating near full capacity. So as power demand grows in tandem with economic growth, utilization rates for gas-fired generation are set to grow also.
Rising demand in the face of flat supply looks like an intractable situation. That is why the North American gas business is globalizing. Overseas resources, chilled to become liquefied gas (LNG), may be shipped from anywhere on the globe and then re-gasified where they're going to be used. There are actually substantial, as well as in some cases huge, gas supplies outside of North America and Western Europe. The difficulty lies in creating the infrastructure that will make it accessible to consumers. Moving "stranded" gas to North America requires new liquefaction plants at the source, an ever-growing range of LNG tankers, and new re-gasification plants at the receiving end. In spite of the high price tag due to this infrastructure--estimated at $2-4 billion to provide gas equivalent to just one percent of United States demand--large volumes make LNG competitive on a per-unit basis. In reality, we calculate that LNG is now cheaper on a unit basis than half of the natural gas produced in North America. The lead time for LNG facilities may be five years or maybe more although the current LNG boom has also been years in the making, and global LNG supplies are set to grow sharply over the next number of years.
As LNG becomes a bigger portion of the North American supply mix, it will transform industry dynamics. Gas from the Rockies will compete with Middle Eastern LNG. A winter cold wave in Europe or in Northeast Asia--or a political crisis in a producing country--will find an echo in North American gas prices. Time will tell if LNG will lead to an absolute reduction from current price levels. The benefit to consumers, however, is clear. Gas prices with LNG will be lower that they can be without LNG.
But this new source still needs to be kept in perspective. Even with growing LNG imports, the domestic natural gas industry shall continue to provide the lion's share of supply--as much as 80 percent a decade from now. However the domestic industry may also have to adapt. Within the past, the successful natural gas producer was the one that made the largest discoveries. This required insight in to the geology, a dash of courage and many more than a little luck.
It will take a whole new breed of producer to participate within an increasingly global business. The new industry will look more like manufacturing, and also the successful producer will be the company that may control costs and harness technology to produce domestic supply efficiently. It will be quite a makeover from the way the industry used to look.
