Highest gas price in america

Gas-well drilling slowed from the frantic early-2001 surge due to free-falling prices. But industrial-market prospects support continued development of ample resources

The following North American report on natural gas supply/demand and related factors starts with a review of U.S. supply, including effects of: wellhead prices; expected gas-directed exploration/development drilling; production/reserve levels; plus effects of North Slope gas, coalbed methane and imports. Further discussion of U.S. demand includes effects of weather and industrial use, storage, pipeline building plans and federal security measures.

Canadian production and reserve status/location are reviewed, noting that the Western Canada Sedimentary basin remains the main supply source. Exports to the U.S. will be about two-thirds of its 6 Tcf production this year. Mexico's Pemex will need to substantially increase its gas-well drilling to keep pace with demand, particularly from its primary source in the NE area's Burgos basin.

Summary comments address the question, "How did we get to this point," going from a production decline in the late 1970s to a "gas bubble," due to market effects from the Natural Gas Policy Act of 1978. The conclusion is that we can drill for and deliver more gas than ever before, and the North American resource base is large enough to support such an effort.

OVERVIEW

Tight supply and extreme price volatility brought on the price chaos of early 2001, but conditions are not ripe for a repeat performance this year. As we turn the comer into 2002, the outlook is a little bit gloomy, with an economic downturn in effect that, hopefully, will be turned around in the second half. Early price numbers indicate that wellhead prices in some areas have slipped below $2.00, and may go lower yet. Look for recovery late in the second half.

Regarding exploration, it is estimated that more gas wells were drilled in 2001 than in any previous year on record. Drilling is not likely to be as strong in 2002, but it is expected to result in about 15,000 gas-well completions, a pretty good improvement over the rate of completions in many recent years.

Gas demand, down in 2001 despite colder-than-normal weather in the 2000-2001 season, is expected to pick up slightly in 2002, driven by industrial consumption in a recovering second-half economy, and some improvement in the electric utility market.

After the players took gas storage to the brink of shortfall last spring, they completely reversed the situation by year-end 2001, largely due to the availability of low-cost gas supply. A warmer-than-normal winter so far this year will squeeze prices available to producers until at least the second half of 2002.

Pipeline construction is expected to be more than 6,000 mi in 2002, and taper off after the North Slope pipeline(s) are built in 2006-2007. The average build for 200 1-2015 will be about 3,000 mi/yr.

For security, it is expected that the U.S. Congress will pass some version of pipeline safety legislation this year. It remains to be seen how far the legislation goes in terms of national energy infrastructure security, and what the cost will be.

U.S.: SUPPLY FACTORS

Wellhead prices are expected to peak above $3.00/Mcf late in 2002. However, the average this year will likely be in the $2.25-2.75 range. High prices brought on by tight supply early in 2001 caused demand to crater, as some users switched fuels and some industrial customers simply shut down altogether. As of this writing, prices m some locations have slipped to under $2.00/Mcf.

The slowdown in gas-well drilling, now in full force, is expected to result in tight supply later this year, lifting average wellhead price to about $3.00 or higher, on the way to something better down the road. It has been said by some production company executives that $3.00 is breakeven.

The year-end status of the storage surplus has the market in a turmoil. It is possible that owners of stored gas may decide to "dump," putting heavy pressure on prices early on. Under the circumstances, we can expect early first-half prices to head south, probably about the time you read this.

Exploration/drilling. The gas-directed, drilling-rig count since mid-year 2001 has been virtually in free fall, and is expected to decline even more yet in the months to come, to about the 600 range, before recovering to something in the neighborhood of 650, Fig. 1. Expert opinion holds that break-even reserve replacement requires a rig count of about 600. As the chart reveals, there was quite a spell during which the rig count was well below 600.

Total gas-well drilling in 2001 is estimated to have equaled or slightly exceeded the previous high number of gas wells drilled in one year--20,166, back in 1981. Development drilling in 2001 set a new record, estimated at 19,000 wells. However, the exploratory-well count, while up year-over-year, was well below anything resembling a record-breaking rate.

The outlook for gas-well drilling in 2002 is for a retreat from the 2001 level to about 15,000, but still ahead of the number of gas wells drilled in the intervening years, as reported by EIA in its Monthly Energy Review.

Production/reserves. Table 1 data, taken from the DOE Annual Reserves Report, lists Lower-48, year-end 2000 proved dry-gas reserves to be 168 Tcf, up by about 10 Tcf from the previous year. We estimate that proved reserves at year-end 2001 are on the order of 180 Tcf, the highest level since the mid-80s, largely as a result of record levels of gas-well drilling in 2000-2001, Fig. 2. The tight supply concerns of a year ago have vanished for the time being.

Reliable sources predict that U.S. gas production will rise to about 26 Tcf/yr by 2015, Fig. 3, making a 30-Tcf/yr market. To support this kind of market will require a dry-gas reserve base of about 220 Tcf. Slicing it another way, we will have to discover about 450 Tcf of new reserves between now and then, more than double the rate for the last 10 years-not exactly a piece of cake.

U.S. production increased by about 1.7% in 2001. to 19.3 Tcf. The outlook for 2002 is for production to stay about even. The shallow waters of the Gulf of Mexico will most likely attract exploration companies seeking to get a piece of the action in the growing Eastern-U.S. gas market. Onshore will be the scene of modest increases in drilling, with coalbed methane taking an ever-larger piece of the action.

The rate of depletion of high-deliverability reserves is an issue with regard to the potential for deliverability shortfall. Low-deliverability, tight-gas reserves do not bring as much to the table as high-deliverability reserves in the Gulf of Mexico. According to the Natural Gas Supply Association (NGSA), offshore GOM reserves are being depleted at rates approaching 50% during the first year onstream. That puts pipeline operators between a rock and a hard place with regard to the cost of building short-lived pipelines and expensive gathering facilities. In other locations, production rates are usually quite a bit less. Also, older existing reservoirs are likely to be well down on their respective deliverability curves.

Reserve additions in the gas-prone areas of the Gulf of Mexico are crucial to maintaining deliverability to Eastern markets. It is imperative that GOM exploration accelerates to assure stability of the gas market in the Eastern U.S. However, that is not what's happening. At last count, there were only 129 rigs working in the Gulf, down from a high of 192 last May.

The problem is gas prices. Jackup utilization cannot be sustained in the present gas-price environment. Jackup utilization now stands at about 65%. The overall Gulf of Mexico rig utilization is under 65%, and dayrates are down accordingly. That is fine for operators coping with depressed gas prices, but tough on drilling companies.

Reserve life index. For the Lower-48, the Reserve Life Index (RLI) at year-end 2001 is estimated to be 9.4, a significant improvement from recent experience. The RLI serves as an indicator of deliverability. A low RLI, i.e., less than 8.0, would suggest tight supply--9.0 or better would restore a measure of comfort level. The U.S. RLI has been in decline for many years, and it was not until year-end 2001 that it climbed back above 9.0. Given the impact of the huge increase in the number of wells drilled in 2001, and the likelihood that 2002 will also be a good year for completions, the RLI will probably remain above 9.0 at least until 2003.