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July 17, 2003
Natural gas prices likely will be volatile and will trend upward in
the future as suppliers drill deeper and spend more to recover gas, but
the extreme price spikes of the 2000 and 2002 winters are less likely to
occur again, according to an analysis by the Northwest Power Planning Council.
?The major gas-producing areas in North America are starting to
decline, new wells are smaller and are being produced more rapidly, the
productivity of individual new wells is declining more rapidly than in
the past, and new supplies are deeper and more difficult to extract,?
said Terry Morlan, the Council's manager of economic analysis.
?On the other hand, countering the current crisis attitude, extraction
technology is improving, current production costs are falling, and the
average productivity of existing gas wells is stable.?
In addition, Morlan said, drilling success is improving, thanks to
improved technology such as directional drilling that allows more
precision in tapping gas supplies, and improved seismic imaging to
locate productive gas fields. He said proven gas reserves are
keeping pace with gas production, and there are fewer dry wells than in
the past.
But price volatility will remain a characteristic of gas markets in
the future because gas prices react directly to supply and demand.
When demand increases dramatically, as it did during the abnormally cold
winters of 2000/2001 and 2002/2003, prices rise dramatically, too.
Prices varied within a narrow range of $2-$4 per million Btu from 1990
to 2000, but jumped up to more than $9 during the winter of 2000/2001
and over $8 last winter. Extreme summer weather can have a
similar, but less dramatic, impact on prices as demand for gas increases
to produce electricity for air conditioning, Morlan said.
?The price volatility of the last three years probably was atypical
because of the extremes of weather and other typical energy market
conditions,? he said. For example, world events such as the
short-term oil production shutdown in Venezuela and the Iraq war limited
fuel-switching from gas to oil in some industries. Fallout from
the 2000-2001 energy crisis also affected industries? ability to
respond to changing prices, he said.
?The fact is that gas is just getting more scarce and more
expensive to recover,? Morlan said. ?In the last year, the
overall supply outlook has been pretty pessimistic.?
Accordingly, the Council predicts generally increasing natural gas
prices. ?We expect average prices in 2003 of just over $5,
declining to about $4 by 2004 given normal weather,? Morlan
said. In the longer term, after 2005, the Council expects prices
will trend upward because new wells likely will be deeper and the gas
more expensive to extract. At the same time, the conventional
natural gas supply increasingly will be supplemented with liquefied
natural gas, which will become more cost-competitive as the overall cost
of conventional natural gas production increases, Morlan said.
There are many responses to gas price volatility, such as reducing
demand for electricity through energy conservation, switching to
alternative and less expensive fuels and hedging against future risks
through long-term contracting for energy supplies. The Council's
next Northwest Power Plan, which is under development, will address
these and other strategies for dealing with price volatility, Morlan
said.
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