The North American natural gas sector will experience unprecedented growth over the coming decade, with increasing demand coming mostly from growing needs in the power generation sector. That the industry will he able to meet this increased demand in the coming decade is evident, in part, through a steady increase in gas-directed drilling in the U.S.

These were some of the key findings of a joint study on North American natural gas trends by Arthur Andersen and Cambridge Energy Research Associates (CERA).

The 30 tcf market
Since 1998, much has been made of the projected growth in the US natural gas market to 30 tcf / year by 2010-15, says Everett Gibbs, Managing Director, Natural Gas Services for Arthur Andersen. "And although not serving as a focal point for this analysis, it cannot be ignored," he said.

"A 30 tcf market would require us effectively to replace our existing reserve base [of about 300 tcf] over the next decade."

As the demand for natural gas for the power industry has grown, he says, many industry insiders have become convinced that the 30 tcf market will become a reality. "We do anticipate that there will be a few humps, so to speak, in the path," he added.

Increased use of natural gas for power generation could double the estimated 5 tcf / year used in the sector, and this increase alone could catapult North American consumption from 26 tcf in 1998 to 30 tcf, Gibbs says.

According to the study, about 15% of the current installed power generation base is gas-fired, while over 80% of all planned capacity is gas-fired.

This is primarily because gas is seen as the fuel of choice, as it meets increasingly stringent emissions limits. But gas-fired and combined cycle plants also entail low capital costs, he adds.

"It's virtually predetermined that the penetration of gas into the power sector will accelerate," says Gibbs. This makes it easy to envision a 4-6 tcf increase in annual demand by 2010.

Despite adequate supply this winter, U.S. spot gas prices should feel "upward pressure this coming summer due to strong demand for storage injections and from new gas-fired power plants, according to a report released by the World Bank. The fact that storage inventories are below last year's levels in the face of relatively modest winter demand "reflects the decline in U.S. production caused by low oil and gas prices in 1998 and 1999, "the World Bank said in its Global Commodity Markets report. That deficit will prompt storage holders to buy more gas for injection during the warm weather months, in turn boosting spot prices, it said.

A record breaking 70% of single-family homes completed in 1999, use natural gas, according to a survey released by the American Gas Assn. The market share of new single-family homes equipped to use gas for heating purposes rose from 69% in 1996 and 1997. In comparison, 26% of new homes were equipped for electric heat in 1998, 3% for oil and 1% for other fuels. The share of new single-family homes using natural gas exceeded the electric share in all regions according to David Parker, AGA's President and Chief Executive. Considering both single-family and multifamily units, the market share of new housing equipped with natural gas remained constant at 64% in 1998.

This year's demand for petroleum products in the U.S. will increase in step with a global oil market that is fast swinging away from surplus. Another year of economic expansion should keep oil consumption rising in the U.S.

Consumption of energy will increase for all the major energy sources this year except nuclear, according to the Oil and Gas Journal. Oil-energy demand will be at 38.24 quads this year, up 1.4% from what the U.S. Energy Information Administration estimates for 1999.

Energy from Natural Gas will increase by 2.1% to 22.56 quads this year, after increasing by 0.9% in 1999. The natural gas share of the energy market will move up to 24.2% in 2000. Together, petroleum and natural gas will continue to dominate the energy market in 2000 with a combined share of 60.8%. A steady rise in energy consumption is being driven by increased demand for electrical power.

Nuclear sources will provide 7.41 quads of energy this year, down 2.5% mainly due to plant reductions. Older nuclear power plants are being retired as their operating costs rise. Environmental concerns and related costs of clean air regulations could slow the use of coal for electrical generation.

Hydroelectric power dropped 7.1 % in 1999 to 3.38 quads primarily due to reduced rainfall and snow levels in key areas.

Oil Supply
The 5,800,000 barrels per day of oil production in the U.S. is a drop of 3,171,000 barrels per day from the high of 8,900,000 barrels per day in 1985. (35% in 15 years).

The Baker Hughes, Inc. count of active rotary rigs averaged 625 for 1999, down from 831 in 1998. The monthly average of 496 in April was the low point for 1999. Last year's rig count set a modern annual record low, breaking the 1992 level of 717.

Crude oil imports will jump 7.2% to an average 9,000,000 barrels per day after falling by 0.5% in 1999. Large withdrawals from storage displaced supply from imports in 1999. Inventories fell more than expected, dropping 2,570,000 barrels. With less oil available from stocks this year, imports will continue to rise. The US Energy Information Administration reports proved reserves of US crude oil fell 7% in 1998, the largest per centage decline in over 50 years. Crude reserves were 21.03 billion bbl, down 1.5 billion from the end of 1997.

An EIA (Energy Information Administration) study noted crude oil prices plunged in December 1998 to levels last seen in 1935, after adjusting for inflation. It said falling crude prices led to a drop of almost 60% in rigs drilling for oil during 1998. This led to a decline in the number of new and producing oil wells, which was followed by the drop in oil reserves.

Natural Gas Supply
Virtually all of the natural gas consumed in the United States is produced in North America. Most (87%) is produced in the United States. U.S. marketed natural gas production will increase to 22.255 trillion cubic feet (TCF) this year from an estimated 22 TCF in 1999.

Total U.S. natural gas consumption will increase 2.1% to over 22 TCF, higher than the peak in demand in 1972. It has long term strength from increased market share for generation of electrical power. U.S. dry gas reserves slipped 2% in 1999, ending four years of increases and offsetting two thirds of the gain from the prior four years. Natural gas reserve additions in 1999 replaced only 83% of gas production.

Electricity generation will be the fastest-growing market for natural gas in the U.S. over the next 15 years, as independent power generators (IPGs) look to gas to help fuel an unprecdented 13-fold increase in market share. The 1999 Electric Generation Sector Summary by GRI projects IPGs will increase their share of the generating market from 3% in 1997, to 27% in 2015. Consumption of gas for electricity generation is projected to nearly double, from 5.6 quads in 1997, to 10.3 quads in 2015. In fact, nearly half of the increase in total U.S. gas demans projected by GRI between 1997 and 2015 (from 22.6 quads to 32.2 quads) will come from use of gas for electricity generation.

During the 1990's, the number of drilling rigs active in the U.S. has fluctuated between 600 and 1,200, while gas-directed drilling has risen steadily (see chart).

"With gas commanding a significantly greater role in the North American energy mix," says the report, " the proportion of the drilling activity directed toward gas has increased steadily throughout the 1990's. Gas-directed drilling utilized less than half of the rig fleet in the early part of this decade, but usage increased to over 80% in the third quarter of 1999.

"Some of this recent increased dominance of gas is related to a slow response to increased world oil prices and a lack of renewed oil-directed drilling to-date by the E&P sector", said the report. But expected further increases in North American gas drilling will go a long way toward ensuring that growing U.S. gas demand is met.

The third largest storage withdrawal ever recorded by the American Gas Assn's weekly survey, 242 Bcf, dropped working gas in storage for the week ending Jan. 28 to 1,775 Tcf, or 54.6% of capacity. According to AGA, heating degree-day data, weather nationwide last week was 12.1% colder than normal. Just two weeks earlier, storage was more than 68% full. Working gas now is 264 Bcf below the year-ago volume; the previous six-year average for the week is a withdrawal of 138 Bcf, and the average working-gas volume for the previous six years is 1,635 Tcf.

The average wellhead gas price this winter will be ahout 30% higher than last winter's relatively low price of about $1.80/Mcf, said EIA's (Energy Information Administration) latest short-term energy outlook. Residential prices over the same period are projected to be almost 10% higher, said the report, released Monday. "Looking past the winter, we do not at this time see much softening of wellhead prices," EIA said, adding that relative to oil prices, gas prices have been stable because of the mild weather this winter. Demand for natural gas in 2000 is projected to rise by 4.2% to 22.4 Tcf, a jump of about 900 Bcf over 1999's level, according to EIA. Gas demand is projected to continue to rise in 2001 by another 2.1% to 22.9 Tcf, somewhat higher than in the previous outlook.