Is The US Gas Market To Collapse?

Since the late 1970?s and early 1980?s, when there was a tight gas supply in the United States, natural gas celebrated a comeback in North America in the 90?s. Especially trade associations spread the message, that gas was a cheap, clean, secure and widely available source of energy. In 2001and 2002, 100?000 megawatts of power generating capacity were built and an additional 100?000 megawatts should be build by 2004.

Today, gas is unrivalled the cleanest hydrocarbon fuel but security and availability of have been decreasing recently and gas has ultimately become expensive. Last winter, prices on the New York Mercantile Exchange came close to $10 per million Btu and have been around $6 recently. When gas was loudest promoted, it was assured that prices would never be higher than $3/MMBtu or so.

The current high prices are advantageous for producers in the short run but have to the potential to destroy demand in the long run. Above $4 natural gas loses its competitive advantage to clean-coal technology and sectors like fertilizers, ammonia or petrochemicals have to look for alternatives.

The supporters of natural gas were only focused on the demand side and forgot the supplies. As the demand was surging, new drilled wells were only adding small volumes of reserves. The gas production in the Gulf of Mexico decreased faster than expected and new undertakings in the deep waters of the Gulf provided for crude but not for the desired gas. Other prospective areas for drillings are inaccessible as they are protected by US federal laws.

Between 1999 and 2002, $72 billion were invested to drill almost 72?000 wells but the reserve replacement reached only 80 percent and the total production even fell by 5 percent. As Canada is experiencing the same problems and Mexico still is importing 750 million cubic feet per day, the shortage cannot be eased through US imports from neighbours. The today?s tight market cannot be compared with the one 30 years ago as it was mainly caused by overregulation. Today, the problem is driven by exhausted resources. Neither more wells nor new pipelines to Alaska and Canada will solve the problem anymore. However, discussions about drilling in sensitive areas in Alaska have started again in order to satisfy the rising demand. That the issue possesses some urgency was demonstrated by Alan Greenspan, the chairman of the US Federal Reserve as he mentioned it during a hearing in the US Congress in May.

Unlikely the cost of oil transportation, the cost of transporting natural gas rises in proportion to the distance. In the case of offshore gas pipelines, expenses can increase heavily beyond a distance of 800-1000 km affecting the local gas price significantly.

For certain regions, liquefied natural gas (LGN) imports might ease the problem. California for example will have the opportunity to buy LNG from Sakhalin II on the Russian Pacific shelf. Mitsubishi Corp. on of the project participants was already seeking permission to build the first LNG terminal on the US West Coast. This could become a long term stable energy supply for California.

If the gas cannot be transported to the US, the country has only the possibility to decrease its energy use. As the energy consumption per capita of the United States is still significantly larger than the use per capita of Germany und Italy together, their must be scope for reductions.


Author: Nana Bendukidze