07-06-04
Natural gas demand in the US and Canada has caught up not only with wellhead supply and also with existing storage capacity and transportation infrastructure, the Merrill Lynch Global Securities Research & Economics Group reported.
"It's going to be a long, hard, expensive slog," analysts Sam
Brothwell, John Herrlin, and Andrew Fairbanks said in a May 26 executive summary
of their research. "New supply sourcing is the central issue, and that
requires downstream infrastructure to be addressed in a comprehensive
manner."
Expecting multi-billion-dollar capital expenditures to keep gas supplies
reliably flowing during the next several years, they listed four key issues:
-- LNG, which Merrill Lynch believes is likely to cost more and take longer to
implement than many industry experts expect.
-- New gas storage will be required with anticipated increased LNG imports.
-- The pipeline network needs some remedial upgrading and some new capacity.
-- Order must be brought to chaotic, displaced markets that focus on the short
term rather than the long term.
"Natural gas prices are likely to remain high and volatile, and temporal physical shortages cannot be ruled out," Brothwell, Herrlin, and Fairbanks said. “By our estimates, [US and Canadian] natural gas productive capacity in 2003 declined 2-3 % and could go down 1 % in 2004. Today, the natural gas industry faces the same conundrum that oil faced in the 1950s... the nation is hooked, domestic supply can no longer meet demand, imports (LNG) are inevitable as is a changing industrial demand landscape," they said.
Currently, the US wellhead capacity is 49-52 bn cfpd, and the Canadian wellhead
capacity is 20-22 bn cfpd. Meanwhile, peak US winter demand can reach 86 bn cfpd,
and gas production is in decline.
The US and Canada represent less than 10 % of the world's known gas reserves, but the two nations consume 29 % of the world's total gas output.
"Higher prices and lacklustre economic conditions may slow growth, but they
won't reverse it," they said.
LNG will augment the US gas supply, but the industry must increase gas storage
capacity along with increasing LNG import capacity, they said.
"Gas storage is a critical infrastructure component to addressing current
and long-term supply security. Over the last decade, likely less than 100 bn cf
of new storage facilities have been added, and most of that capacity was for
peaking-related activities.... More baseload storage facilities need to be
built, but that's not easy or cheap," they said.
Post-wellhead infrastructure capital expenditures are estimated at $ 5-$ 10 bn/year for the next several years, said Brothwell, Herrlin, and Fairbanks. They said pipeline costs are estimated at $ 1-$ 2 bn/year, which some believe is a conservative figure. Estimates for construction of the proposed Alaska gas pipeline alone are about $ 20 bn total.
Regarding LNG, each additional 1 tcf of import capacity is expected to cost at
least $ 1 bn, including both new terminals and shipping capacity. Merrill Lynch
believes that 2-4 tcf/year of annual imports will be needed in 5 years.
Merrill Lynch believes that an incremental 1 tcf/year of imported LNG will
require 150-250 bn cf of incremental gas storage, expected to cost $ 10-$ 12 mm/bcfe.
That suggests $ 1.5-$ 2.5 bn/year in gas storage investment.
"The industry's market capitalization has fallen precipitously in the past
5 years. Clearly, there is a big need for incremental infrastructure investment,
but a smaller number of qualified players. At the same time, the industry's risk
profile has risen through deregulation and its attendant foibles. As a result,
addressing the supply-demand imbalance will not only require capital at the
drill bit, it will require capital to build the downstream infrastructure... in
a riskier environment," they said.
LNG is expected to become the marginal gas supply source, and it might set the market clearing price, Brothwell, Herrlin, and Fairbanks said.
"End users will embrace it as a competitive weapon, and ultimately, it
probably will bring gas prices down, but not to the $ 3.00 level seen just a few
years ago," they said.
Source: Oil & Gas Journal