FOR IMMEDIATE RELEASE SEPTEMBER 8, 2000 BY THE GOVERNMENT AFFAIRS COMMITTEE OF THE AAPG DIVISION OF PROFESSIONAL AFFAIRS
AN IMPENDING NATURAL GAS SUPPLY PROBLEM EXPECTED TO RAISE HOME HEATING COSTS THIS WINTER
In early 1999, during a period of low energy prices for oil and natural gas, the public was warned by many energy analysts of a potential future shortage of natural gas. No one was listening. Despite an overall very mild winter in 1999-2000, we now face the looming reality of a natural gas shortage, as suppliers struggle to fill gas storage facilities in preparation for the peak usage winter heating season.
Why does the nation face a potential supply shortage? The primary reason is that average capacity to produce natural gas at the wellhead (productivity) in North America has declined significantly in the past decade. This has occurred at the same time that demand has increased at an unanticipated pace, particularly for electric power generation. Further, low commodity prices and regulatory roadblocks, have discouraged investment in new wells to replace depleting reserves. Decreasing deliverability of gas from lower productivity wells makes it very difficult to fill storage rapidly, even during the traditionally low demand summer season. These factors have now created the potential for a price shock for consumers, and supply interruptions for industry, during the coming winter heating season.
Prices for natural gas have doubled in the past year. Uncharacteristically, the price spiked this year in the late spring, and during the summer months, when gas is injected into storage for the upcoming winter. In April, approximately one trillion cubic feet was in storage, down 400 billion cubic feet from last year, and at the low end of normal spring storage levels. Historically, storage is filled from April lows, until October, when maximum storage typically ranges from 2.6 to 3.0 trillion cubic feet. The ability to refill has declined from 2.05 trillion cubic feet added to storage during these months in 1996, to 1.6 trillion cubic feet added in 1999. This year, additions to storage have averaged 300 billion cubic feet per month since April, and total storage is now at least 436 billion cubic feet less than last year, well below normal. Assuming last year's fill rate, gas in storage by October will be 2.6 trillion cubic feet or less, the lowest volume since 1996.
Gas withdrawals have ranged from 1.6 trillion cubic feet in the mild winter of 1998-99, to 2.6 trillion in 1995-96 and 1997-98. Assuming a very mild winter similar to last year, we could end up with less than 500 billion cubic feet remaining in storage by next April. But, with even a moderate winter, similar to the relatively mild winter of 1997-98, we could be facing the total depletion of this summer's storage.
Although the North American rig count has now nearly doubled to 1000 rigs since the historic lows of 1998-99, it remains far short of the 4,000 working drilling rigs when the petroleum industry was robust in the early 1980's. The effects of new drilling on overall deliverability of gas will be minor with this number of working rigs, because sufficient wells with high productivity to offset normal decline, will not be drilled. The industry is still constrained by a lack of capital, manpower, and equipment, and the results of punitive and shortsighted policies of taxation, over regulation, market manipulation and restricted access to prospective lands by government.
Even removing the Alaskan North Slope from consideration, over 200 trillion cubic feet of gas could be found and developed in areas where exploration and production are prohibited or severely restricted (Source: MMS, USGS). Although abundant gas reserves clearly exist, the industry will not be able to significantly increase deliverability this winter, and possibly not by next winter. Industry can increase supply deliverability of natural gas in the future, but only with changes in government policy to encourage and restore a healthy industry.
For consumers, the price of natural gas for home heating this winter will significantly increase. Since March, the wellhead cost of natural gas now being placed in storage, has doubled to over $4.50 per thousand cubic feet. Although the actual fuel cost is only a fraction of what consumers pay at the burner tip, varying by local utility, additional fuel cost surcharges can be anticipated. Some analysts are predicting that the typical consumer may see a $200 to $300 increase this winter in gas their bills. For electrical customers the price shock could occur even sooner, as natural gas is an increasing component of the fuel source mixture for power generation. This is particularly true for peak-use generation. Should late summer 2000 be hotter than normal, as is proving to be the case, gas use in peak electric demand periods can draw only on the supply of high-cost gas, causing consumers to see the effect almost immediately.
More ominous, is the possibility of a cold winter with high demand on natural gas after a hot summer. In this scenario of storage depletion, significant industrial disruption from electrical shortages, gas curtailments, and even cold homes could occur. Natural gas prices could be expected to significantly increase even from this summers high levels in this scenario, as utilities scramble to secure supply. For this reason, we urge that consumers:
1) Budget for higher fuel costs
2) Insulate or check insulation in homes; conservation is important!
3) Check furnaces and replace with more efficient units or repair damaged units
4) Raise thermostats in summer and lower them in winter
5) Be prepared for disruptions in the worst case scenario
Twenty-five years ago, we were faced with similar short term supply shortages of natural gas. Poor government policy, coupled with a false belief that we were running out of natural gas, directly contributed to the decline of domestic natural gas production . In less than a decade, production declined from 22.6 to 15.8 trillion cubic feet per year. During the late 1980s, government usage and price controls were removed, and the industry responded with increased drilling activities, propelled by the application of new technologies. Last year, domestic natural gas production increased to 19.6 trillion cubic feet. Imported gas from Canada supplied the balance of gas needed for U. S. domestic consumption.
Government should encourage both conservation and new gas development. It must recognize that energy drives our economy, and damage to the energy industry, will damage the overall economy. The United States has abundant undiscovered and undeveloped natural gas resources. It is poor policies that have led to a potential supply crisis, not the lack of natural resources.
We can overcome the potential shortage of natural gas supply in the United States. To do so, government, industry and the public must work together to develop our precious resources in a safe, timely and rational manner.
For further information contact Richard Green, LaRoche Petroleum Consultants, Inc., 4600 Greenville Ave., Dallas, TX 75206, 214-363-3337, or Lee Gerhard, Kansas Geological Survey, 1930 Constant Avenue, Lawrence, KS 66047, 785-864-2195.
This information bulletin was prepared by the Government Affairs Committee of the American Association of Petroleum Geologists as a public service. Permission is granted to republish this document.