Natural Gas in North America

Natural Gas (“NG”) production in North America appears to have peaked in 2001 at 19.616 trillion cubic feet (“tcf”), and despite increasing our drilling efforts by over 120% since then, production has fallen to 18.523 tcf in 2006 (it had fallen to 18.074 in 2005 but rebounded somewhat in 2006.) The predictive powers of the U.S. E.I.A. and (chuckle) Cambridge Energy Research Associates leave something to be desired. In 1995, and as recently as 2002, both organizations were in print saying NG production and supply would be able to grow without constraint until at least 2020 (Gufaw!). Here, in chronological order by year is U.S. NG production in tcf:

2001: 19.616
2002: 18.928
2003: 19.099
2004: 18.591
2005: 18.074
2006: 18.531

In 2006 we imported 4.187 tcf, with the vast majority 3.604 tcf coming by PIPELINE from Canada. Canada exports about HALF of its NG production to the U.S. – and here comes the rub: Canada’s production appears to be in decline, and its internal consumption of NG is rising (sound familiar?). Declining Canadian production and increasing domestic demand is a recipe for DRAMATIC decline in NG exports to the U.S. And just in case you think Mexico is coming to the rescue… the U.S. imported a paltry .013 tcf of NG from its neighbor to the south. Worse, the U.S. will most likely have to export some of its largess to Mexico for political reasons, as Mexico is a major oil EXPORTER to the U.S.

And the hits keep coming… The rate of decline in North American NG production is likely be far, far, far steeper than the decline rate in crude oil production due to the unique geological properties of NG (as a gas it comes out of the ground under pressure, and when that pressure is gone that is the end of the well, and a NG well gives little indication of the when the end is near. One day you show up for work and the pressure gauges pretty much tell you it is time to look for other opportunities.)

The problem for the U.S., and all of North America, is that there are no NG pipelines from Iran, Russia, or Oman coming into North America. NG use is 99% driven by local, or at least local as in your own continent (and forget going over mountain ranges like the continental divide making western and eastern North America 2 separate energy islands for both oil and NG).

So, what are the U.S. EIA and CERA saying now? I found this pearl of wisdom on CERA’s website (Please note the date):

HOUSTON, February 8, 2006 – As North Americans experience their most expensive winter on record in terms of energy consumption, many industry observers and participants—as well as consumers—have concluded that higher natural gas prices are here to stay. Many now believe that high natural gas prices are no longer spurring a supply response, and that the price of natural gas at the Henry Hub—the US benchmark—will never again fall below $5.00 per million British thermal units (MMBtu).

In contrast, Cambridge Energy Research Associates (CERA) expects prices to gradually ease over the coming years, and eventually return to sub-five dollar levels.

Relief Alternatives Limited

“Sustained natural gas price relief can occur only when demand is permanently destroyed or when substantial new sources of supply become available,” Robert Ineson, CERA Director for North American Natural Gas, told a briefing at the firm’s CERAWeek 2006 here today.

Demand for natural gas in the United States and Canada will exhibit remarkable resilience over the next few years, and will remain strong despite high natural gas prices. “There will be little price elasticity in the residential, commercial, and power sectors. The industrial sector has already been pared back to a toughened core. Natural gas demand for power generation will grow despite ongoing gas price strength,” Ineson said.

CERA believes that consumers will realize substantial price relief only if a significant increase is made in the supply of natural gas available to North America. The source for additional natural gas supply will not be the increasingly mature producing basins of the United States and Canada, despite rising production from unconventional gas resources—including coalbed methane, shale gas, and tight sandstones.

LNG the Only Source

CERA believes the answer is liquefied natural gas (LNG). “Meeting North America’s growing natural gas requirements in the face of stagnant indigenous productive capacity will not be possible without increasing volumes of LNG imports from overseas,” according to Ineson. “Simply put, there is no Plan B. LNG is the only potential natural gas supply source big enough and timely enough to meet the need.”

“Major new LNG regasification projects will begin to come on stream in 2008,” Ineson said. “As the new supplies enter the market, North American natural gas price pressures will begin to ease. CERA expects LNG deliveries to outstrip continental gas demand growth between 2008 and 2010, sending prices below $5.00 per MMBtu.”

Well, there you have it, and since we are going to IMPORT our way out of this problem, we will need to go headlong into the construction of the infrastructure necessary to import all of the NG we are going to need in the form of Liquid Natural Gas (Want to make a bet that whoever benefits from any construction contracts is a client of CERA?).

Once again, we have a blatant attempt to manipulate the public with propaganda; promoting solutions that do not take into account the scale required to have a meaningful impact. How much will the projects underway (expected to be completed 2010) be able to add to U.S. NG consumption? A whopping 1 to 2%, and this is only if the exporters can actually fulfill their part of the transaction. Care to make a bet on the eventual completion date? Now take a good look at the North American NG production decline rate and the U.S. in particular. And why do the major oil companies pay these guys tens of millions of dollars per year even though they have been wrong in every market call and production forecast since 1998? Because CERA says what their customers want the MEDIA to hear (read any story about future energy supplies in ANY major news outlet and you will likely find that CERA is an acknowledged source). Big oil and others can fund these guys by “retaining” them as consultants, and then plant their misinformation in major news outlets giving them great legitimacy – with no liability to the guys who are really pulling the strings. Clearly, they learned something from their mishandling of the climate change public relations fiasco. (Disclosure: I own stock in most of CERA's clients. So what am I complaining about? The interests of the executives at these companies do not always (rarely) intersect with that of their shareholders.)

Assuming the LNG market will actually develop (I sincerely doubt this. I will poke holes in this argument big enough to drive a truck through in a future post) to the point where it was possible to solve our short-term supply problem…Didn’t these guys learn anything from our Oil predicament? Did they skip the “America is addicted to Oil” speech? The U.S. can barely fund its imported oil purchases (and does so through the issue of IOU’s), can you imagine the impacts to our trade imbalances and the value of U.S. dollar if these guys were right?

The bottom line is this: North America is confronted with a NG shortage as well as an oil shortage. Understanding the magnitude of the issue will give you an opportunity. Or you could pull a Jim Hanson. Just ignore the issue and hope it will go away.

Hold on to your wallets.

Yours for a better world.

mentatt (at) yahoo (dot) com

P.S. Jim Hanson was the creator of the muppets. He died of what would have been a very curable "Strep" infection, but decided to ignore the issue and hoped it would go away. It did.