The Secret Guide To Natural Gas Services
The North American natural gas business will be in the process of reinventing itself. Only recently, it was a land-locked business that had to sell aggressively to find customers for its plentiful fuel. It is increasingly becoming a global business which will continue to push itself to meet burgeoning demand. But this is no quick fix; it's going to take years because of this transformation to be completed.
What a turnaround. Just a decade ago, the natural gas industry was entering the second decade of a supply surplus colloquially known as the "Gas Bubble." Oversupply meant chronically affordable 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 thirty percent 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 didn't find oil, however the good news was that they didn't find gas.
The late 1990s brought a series of changes that began the industry's transformation. Natural gas started to get to be 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 benefits of gas--easier to get approved than power plants that used other fuels. At the same time, gas was cost-effective and plentiful. In the climate, the electric power industry embarked on an important building campaign, ultimately adding over 200 gigawatts of new gas-fired electric generating capacity, a 25% jump altogether power capacity. But underlying this was an essential assumption that natural gas would remain cheap and plentiful. More homes and businesses turned to gas for heating and cooking, also.
Still, even as the construction boom was in full swing, the supply side of the sector began to undergo a dramatic change. Through the late 1990s, a decade 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 price of ten years earlier. A year of benign weather allowed prices to ease to about $7.00 in early 2007--still well above the levels of the 1990s. With the recent cold weather, they have bounced back.
Why have prices risen so much over the past decade? There are actually two reasons. On the supply side, it's geology. And also on the demand side, it's the growing significance of gas-fired power generation.
Since 1999, drilling activity within the United States of America has risen more than 300 percent. In spite of this, production has remained flat. This perplexing result is rooted in 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 hard to extract or far from the pipelines that can carry the gas to market. These more challenging deposits also are more expensive to create, which puts a squeeze on project profitability, even with higher fuel prices. In addition to that, costs of the services used to discover and develop new fields have risen substantially.
While production stays flat, demand is poised to continue growing--primarily because increasing consumption within 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 plants 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 within the face of flat supply looks like an intractable situation. This is why the North American gas business is globalizing. Overseas resources, chilled to become liquefied natural gas (LNG), can be shipped from anywhere in the world and then re-gasified where they're going to be used. There are actually substantial, and in certain instances huge, natural gas providers gas supplies outside of North America and Western Europe. The difficulty lies in creating the infrastructure that can make it accessible to consumers. Moving "stranded" gas to North America requires new liquefaction plants at the source, an increasing range of LNG tankers, and new re-gasification plants at the receiving end. Despite the high price tag because of this infrastructure--estimated at $2-4 billion to provide gas equal to just one percent of United States demand--large volumes make LNG competitive on a per-unit basis. Actually, we calculate that LNG is now cheaper on a unit basis than half of the gas produced in North America. The lead time for LNG facilities can be 5 years or even more however the current LNG boom has also been years within 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 will be without LNG.
But this new source still must be kept in perspective. Even with growing LNG imports, the domestic natural gas industry continues to provide the lion's share of supply--as much as 80 percent 10 years from now. Although 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 a lot more than a little luck.
It will take a brand new breed of producer to participate within an increasingly global business. The new industry shall look more like manufacturing, and the successful producer will be the company that may control costs and harness technology to produce domestic supply efficiently. This will certainly be quite a makeover from the way the industry used to look.
