Making Over an Industry North American Natural Gas
The North American natural gas industry is in the process of reinventing itself. Only recently, it was a land-locked business that had to sell aggressively to find customers for its plentiful fuel. It is increasingly becoming a global business that will continue to push itself to meet burgeoning demand. But this is no quick fix; it will take years for this transformation to be completed. What a turnaround. Just a decade ago, the natural gas industry was entering the second decade of a supply surplus colloquially known as the "Gas Bubble." Oversupply meant chronically low prices. The price of delivered natural gas fell 42 percent in real terms from the mid 1980s to the mid 1990s--to $1.72 per thousand cubic feet by 1995--even though consumption had grown by 30 percent during that period.
These low prices put the industry into survival mode. In those days, producers who drilled a dry hole would say that the bad news was that they didn't find oil, but the good news was that they didn't find gas. The late 1990s brought a series of changes that began the industry's transformation. Natural gas started to become the fuel of choice in electric generation. Improved turbine technology increased the efficiency of gas-fired electric power plants, which were also cheaper to build and--because of the environmental benefits of gas--easier to get approved than power plants that used other fuels. At the same time, gas was inexpensive and plentiful. In this climate, the electric power industry embarked on a major building campaign, ultimately adding over 200 gigawatts of new gasfired electric generating capacity, a 25 percent jump in total power capacity.
Yet, even as the construction boom was in full swing, the supply side of the industry began to undergo a dramatic change. By the late 1990s, a decade of steadily rising production had whittled away the overhang of capacity. Supply, which had been chronically in surplus, was now just in balance with demand. Mild winters in 1997-98 and 1998-99 forestalled the inevitable price adjustment. But in 2000, a hot summer triggered surging prices nationwide and exacerbated a power crisis in California. Since then, the market has continued to tighten and prices have generally risen, reaching $8.80 per thousand cubic feet in hurricane-ravaged 2005, more than five times the price of a decade earlier. A year of benign weather allowed prices to ease to about $7.00 in early 2007--still well above the levels of the 1990s. With the recent cold weather, they have bounced back.
Since 1999, drilling activity in the U.S. has risen more than 300 percent. Despite this, production has remained flat. This perplexing result is rooted in the maturity of the gas resource base in North America. Although gas remains available and new fields are continually being identified and developed, many of these deposits are deeper, smaller, embedded in harder rock from which gas is more difficult to extract or far from the pipelines that can carry the gas to market. These more difficult deposits are also more expensive to develop, which puts a squeeze on David Pulman GSK project profitability, even with higher gas prices. On top of that, costs of the services used to find and develop new fields have risen substantially.
While production stays flat, demand is poised to continue growing--primarily because increasing consumption in the power sector is virtually locked in. Much of the recently installed gas-fired generation is utilized at low rates today. But most of the non-gas power plants are operating near full capacity. So as power demand grows in tandem with economic growth, utilization rates for gas-fired generation are set to grow as well.