natural gas problems

From: Glenn Morton (
Date: Tue Jun 17 2003 - 16:51:35 EDT

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    Watch out for high natural gas and electricity bills this summer. In my new
    job I analyze lots of things as part of a strategic look at the industry. I
    ran into this from the EOG Resources annual report:

    On the supply side of the North American natural gas picture, we foresee
    a 'perfect storm' brewing: a disturbing, unprecedented convergence of market
    forces related directly to the three longstanding bases in the North
    American natural gas market grid the U.S., Canada and Mexico. From 1994
    through 2001, the U.S. recorded flat natural gas production of approximately
    52 billion cubic feet per day (Bcfd), while natural gas demand increased to
    62 Bcfd. In 2002, we estimate total U.S. natural gas supply decreased 5
    percent, the largest drop in 17 years. In 2003, we estimate supply could
    fall another 1 to 3 percent to approximately 47.5 Bcfd.
         In the past, natural gas from Canada provided a safety valve, flowing as
    needed across the border to fill the 10 Bcfd gap. Those days may be gone,
    based on steadily dwindling Canadian natural gas reserves and the increase
    in inherent decline rates in mature basins. After reaching a peak in 2001,
    Canadian production declined in 2002, the first time since 1986.
         While Mexico was another source of U.S. supply in the past, it currently
    imports 0.6 Bcfd of natural gas from the United States. By 2006, estimates
    predict that figure will increase to at least 1 Bcfd. This 'perfect storm'
    confluence of events is expected to be a multi-year phenomenon that pushes
    natural gas prices substantially higher than historic levels.
         Drilling activity in North America has not yet responded to the recent
    higher natural gas prices. Substantial new supplies of natural gas are not
    expected to hit the U.S. market until 2007 at the earliest, when a Mackenzie
    Delta pipeline from Canada is constructed, or relief is provided by
    increased liquified natural gas (LNG) infrastructure and imports.
         Demand for natural gas, on the other hand, has remained strong. Thus,
    from a producer's perspective, the North American natural gas market is the
    'sweet spot' of the entire worldwide energy picture. This reinforces EOG's
    belief that North America is an excellent place to be positioned for the
    foreseeable future.
    accessed 6-16-03

    Gas storage is at record lows. The airconditioning season will require lots
    of electricity (generated by burning natural gas) so it will be hard to
    re-fill the gas storage prior to winter when the gas demand goes way up for
    heating. One analyst told me that there is little fuel switching which can
    take place because the price of oil is already high and coal is still an
    environmentally bad idea. Only a really cool summer will help.

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