The short and long-term outlooks for natural gas supply and demand in the US came under scrutiny in 1999.
Opinions of industry observers, however, were spotlighted by several facts: US gas demand, although increasing gradually, took a downward turn in the last half of the 1990s; domestic production flattened; and the country was importing growing volumes of gas from Canada and elsewhere.
In addition, wellhead deliverability of gas in the US was declining in a trend veiled by the lag in demand growth, largely the result of atypical weather patterns.
Meanwhile, various expansion projects came on stream in 1999, increasing the flow of gas to market.
Overall, however, the longer-term outlook for natural gas as an energy source was bright, said Gas Research Institute.
"With an expectation of continued low gas prices, strong economic growth, and technology improvement, [US] gas demand is projected to increase from 22 tcf in 1997 to 31.3 tcf by 2015," said GRI.
"To achieve this level of growth, the gas industry will need to adapt to the rapidly changing energy markets. This includes changes in market structure, regulation, and competitors, among many factors."
Production, demand
According to the US Energy Information Administration, US natural gas marketed production-the gross withdrawals not including gas used for repressuring, nonhydrocarbon gases removed during processing, and vented and flared gas-fell to 19.6 tcf in 1998 from 19.9 tcf in 1997 (Fig. 1). These marketed production volumes, said EIA, were down 13% from a peak of 22.6 tcf in 1973.
The four states that lead marketed gas production-Texas, Louisiana, Oklahoma, and New Mexico-produced 75% of total US marketed gas in 1998, said EIA. And in 1998, a total of 32 states showed gains in marketed gas production. Leading the US in 1998 were Texas and Louisiana, collectively accounting for almost 59% of total marketed gas production, according to EIA.
Of the five states with offshore gross gas withdrawals in 1998, said EIA, two had declines. Texas showed a decrease of 104 bcf, or 8%, and Alabama showed a decrease of 16 bcf, or 4%.
Deep offshore hopes
US offshore production declined 88 bcf, or 1%, to 5.8 tcf in 1998 from the 1997 level, EIA said.
"Offshore gross withdrawals accounted for 24% of the total US gross withdrawals in 1998," EIA said.
Gas production from the Gulf of Mexico Outer Continental Shelf, however, was to be of particular importance if longer-term increases in US demand were to be met without major increases in imports. The number of deepwater projects that had reached or were approaching the development phase by 1999 made a gas-production increase very likely. Overall gulf production was expected to reach 10-20 bcfd by 2002 (Fig. 2). There were concerns, however, over certain shallow-water projects` production levels.
"The gas production trends to date indicate that the bulk of production in the offshore will flow from shallow-water fields. Thus, if shallow-water fields do not maintain their level of production, the offshore Gulf of Mexico total likely will decline as reductions in the much larger shallow-water production rates would more than offset anticipated new deepwater gas production," EIA said.
Therefore, increased production from the gulf would rely on both shallow and deepwater finds.
The high case of EIA`s gulf production outlook saw an increase to 20 bcfd by 2002. EIA said, "Introduction of such large volumes in a relatively short period would have a significant impact on regional gas markets. This volume is equivalent to 10.6% of total gas produced in the US during 1997...Any large incremental volumes from deepwater fields depend on development of both the projects themselves and the associated infrastructure, so these volumes are less certain than those from shallow-water fields."
Imports and expansions
According to EIA, net imports of natural gas by the US represented 14% of gas consumption in 1998. And 1998 marked the 12th consecutive year that net imports increased.
Imports came almost entirely from Canada. EIA noted, "Canada continued to be, by far, the primary supplier of imported gas. Canadian imports increased significantly in 1998, reaching 3.1 tcf and accounting for 97% of total US imports. With greater utilization of existing pipeline capacity and the completion of several pipeline expansions, imports from Canada grew by 5% from 1997 to 1998."
During 1998, at least 46 separate natural gas pipeline projects were completed, which increased capacity to the national grid by more than 7.6 bcfd. About 57% of this capacity was brought on stream through expansions and upgrades to existing systems. Eleven new pipeline systems were added to the nation`s gas pipeline network during 1998.
The most extensive pipeline development-adding the most sizeable regional addition of new capacity-was in the Gulf of Mexico. Expansion of production demanded the addition of new lines to bring about 2.6 bcfd, or 34% of all new capacity, onshore.
Among the significant expansion projects adding US import capacity:
- The 126 MMcfd Great Lakes Gas Transmission expansion project from Manitoba, Canada, to St. Clair, Mich., was completed in November 1998.
- Completed in December 1998, Northern Border Pipeline Co.`s 243-mile Chicago project marked the largest capacity addition during that year. The line, which began flowing gas to the US in 1999, increased capacity by 700 MMcfd from the US-Canadian border at Port of Morgan, Mont., to Iowa.
- About 35 MMcfd of import capacity was added in the US Northeast on Iroquois Gas Transmission`s system.
- The 178 MMcfd Portland Natural Gas Transmission System (PNGTS) came on stream in March 1999. PNGTS extends from the US-Canadian border near Pittsburgh, NH, to Westbrook, Maine, where it connects in southeastern Maine with the PNGTS/Maritimes & Northeast Pipeline.
- The 230-mile Destin Pipeline system, the largest single new pipeline project in terms of capacity, was placed in service in July 1999. The system can flow up to 1 bcfd from the Destin Dome area in the gulf to interconnections onshore with five interstate pipelines in Mississippi.
- Production from the Sable Island Offshore Project, off Nova Scotia, increased Canadian supplies during 1999. The project-the first commercial production of natural gas from a major Atlantic field off North America-is capable of supplying up to 440 MMcfd of gas, which, starting in November 1999, was brought to New England via the Maritimes & Northeast Pipeline system.
- One of the most anticipated expansions, the Alliance Pipeline project, slated to come on stream in 2000, was designed to carry 1.3 bcfd of wet gas from western Canada to the US Midwest south of Chicago.
Numerous other proposed projects were due to come on line in 2000. EIA stated, "In all likelihood, however, some of the 75 proposed projects may be canceled or postponed until the next decade, because of competition, changed market conditions, and/or regulatory actions."
If all planned projects were completed, said EIA, an additional 3.7 bcfd of capacity would be in place by 2000. All told, during 1990-2000, import capacity would have increased by about 132%.
The US also imported gas from Mexico. In 1998, the volumes from Mexico totaled 15 bcf-a 16% decrease from the year before-despite a 12% drop in price. Lack of shipping capacity on the US side of the border kept Mexican state oil firm Petroleos Mexicanos from exporting larger quantities, said EIA.
Increased imports came from LNG supplies, which reached 85 bcf-the highest level since 1983 and 10% above the 1997 level, said EIA. Eighty percent of the LNG imports in 1998 were supplied under long-term agreements with Algeria. The remainder came through spot purchases from Australia and the United Arab Emirates.
Consumption
According to the EIA, total natural gas consumption declined by 3% from 1997 and 1996 levels during 1998 to 21.3 tcf.
"Warmer-than-normal winter temperatures in 1998 reduced the demand for natural gas for space heating in the residential and commercial sectors," said EIA. "These declines during 1998 were partially offset by the increase in natural gas consumption by electric utilities. Since 1992, natural gas has accounted for nearly one quarter of total consumption in the US."
The largest decline in natural gas demand, with 4.5 tcf consumed in 1998, was the residential sector, says EIA. This total was down 9%, or 463 bcf, from the 1997 level.
"Much of the decline may be attributed to warmer-than-normal temperatures during the heating season-November through March-and the effects from El Niño in the Pacific region during 1998," EIA said. "These warmer temperatures resulted in reduced demand for space heating, which is the primary use of natural gas in the residential sector."
Commercial gas consumption in 1998 declined from the all-time high of 3.2 tcf in 1997 to 3 tcf in 1998, EIA said.
The industrial sector-the leading consuming sector-used 8.7 tcf of gas in 1998, down 2% from 1997. The sector includes nonutility generators of electrical power.
Deliveries to electric utilities during 1998, said EIA, increased by 290 bcf to 3.3 tcf in 1998.
"Sustained periods of very high summer temperatures in the Southwest region, particularly in Texas, contributed greatly to the increased demand, which peaks in July and August," EIA said. "Nationally, Texas accounted for 38% of the natural gas consumed by this sector in 1998, followed by Louisiana, with 10%."
Supply, deliverability
A GRI report analyzed various gas supply sensitivities against a 1999 baseline projection for 2015 (Fig. 3). Through the analysis of these sensitivities, GRI intended to quantify the potential impact of changes in each of these parameters. The price and supply deviations were determined for each supply sensitivity.
GRI`s projection was particularly sensitive to three key parameters:
- The rate of exploration and production technology improvement.
- The size of the gas resource base.
- Industry investment levels in exploration and production.
GRI evaluated each supply sensitivity separately to determine a range of supply and price impacts.
"Each sensitivity was run in two formats," GRI said. "In the first format, price was kept at the levels established in the 1999 edition of the baseline projection, and the model was solved for supply constrained by the changes in the key parameters. In the second format, the demand targets for supply were kept constant at the levels in the 1999 projection, and the model was solved for price."
Using this process, GRI was able to determine certain endpoints between which its results could fall, given the varied results for each key parameter.
GRI determined that the technology parameter showed the greatest percentage change. It explained, "In [the technology] sensitivity, there was either a 41% supply shortfall by 2015, or the price increased by 64% to attract the needed supply.
"The resource base sensitivity had the next largest impact. Depending on the magnitude of the resource base cut, there was a supply shortfall [of] 9-25%, or gas prices would need to increase by...17-68% by 2015, respectively, above the levels in the 1999 baseline projection to offset the resource deficiency in this sensitivity.
"Following in overall impact were the reduced-reinvestment and higher offshore [economic] hurdle sensitivities. The reduced reinvestment sensitivity resulted in an 8% supply shortfall, which would require a 23% increase in price to eliminate. Combining a higher offshore hurdle rate with the lower reinvestment sensitivity results in a 12% supply shortfall, which would require an 18% increase in prices to offset. Overall, Gulf of Mexico production in 2015 was reduced by 1.1 tcf and 2.4 tcf, respectively, in these two sensitivities.
Although the US may find its way though certain supply issues, natural gas wellhead deliverability in 1998 declined by almost 1.5 bcfd, or about 3%, from a year before, said investment firm PaineWebber Inc. The firm said, "This [decline] has been somewhat offset by greater nuclear and hydropower supplies, higher Canadian imports, and depressed demand by the chemicals industry. Nonetheless, natural gas storage injections have failed to approach levels witnessed last year [1997] during this period, despite 7% cooler temperatures, on average, compared with [1997] during mid-April through July."
Helping to depress wellhead deliverability in 1998 was a drilling slump caused by low oil and gas prices.
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Despite US natural gas demand hitting a decline and production remaining relatively flat in 1999, the construction of distribution systems continues to increase deliverability within and to the US. Here, H.C. Price Co. employees lay a section of the 204-mile Maritimes & Northeast Pipeline system in mid-1999. Once completed, the line, which is an extension of the Sable Offshore Energy Project, will transport 360 MMcfd of Nova Scotian gas to markets in the Northeast US. Photo by Patrick Crow.
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