Ann Chambers

Power Engineering Associate Editor

Contrary to most standing predictions, natural gas prices may be getting ready to start climbing. The electric power industry`s consumption is driving growth in the natural gas industry, and the gas producers just can`t keep up. Low natural gas prices combined with leaps in efficiency through technological advances, such as combined-cycle applications, have created "great value" in gas-fired electric facilities, according to Forrest Hoglund, Enron Oil & Gas chairman, recently retired. Enron Oil & Gas recently changed its name to EOG Resources. Natural gas consumption as a whole is expected to continue growing at about 2 percent annually, while natural gas consumption in the electric power industry jumps about 6 percent annually. According to the last predictions from Enron, world natural gas consumption will nearly double by 2020 (see table).

The Gas Research Institute (GRI) also predicts demand growth. The largest portion of growth is seen in the "price-sensitive" electric power generation sector, according to the 1999 GRI "Baseline Projection Data Book." GRI shows primary U.S. gas consumption growing at an annual rate approaching 2 percent, about 67 percent faster than the growth rate for total primary energy consumption. The natural gas share of the total energy market is expected to jump from 24 percent in 1997 to 28 percent in 2015. Gas demand in the electric generation sector is projected to grow from 3.3 quads in 1997 to 7.4 quads by 2015. (GRI separates cogeneration and distributed generation, placing them in its commercial use sector. These figures are for centralized utility generation only.)

Using constant 1998 dollars, average natural gas price to all end users fell 43 percent between 1985 and 1998, according to Enron`s data. The electric generation sector has seen the largest price decline with a 56 percent drop, the industrial sector received a 49 percent cut, while commercial saw a 34 percent slip and residential only saved 26 percent.

Hoglund said the industry`s experience over the past few years has shown that the producing community will "carry on at low to no returns longer than anticipated."

However, domestic gas production has been flat since 1994, even with increasing levels of gas drilling. Currently, gas well drilling is 8 percent lower than a year ago, so domestic production will likely see a decrease for 1999. Canadian production growth is also slower than expected, while gas demand continues to climb. The result will be upward pressure on gas prices before the end of the year, Hoglund predicted when speaking at the International Gas Turbine Institute`s "Gas Turbine Technology Risk `99" in Houston recently. Natural gas prices should experience more volatility with a general upward trend in prices, Hoglund said. He also predicts a return to longer-term contracts, especially for the power plants that must have a secure supply of fuel. He predicts that a price jump of $0.50/Mcf will be needed for the industry to be able to meet demand projections. Natural gas is currently about $2.65/Mcf.

Comparing the second quarter of 1999 to the same quarter of 1998, the 14 major integrated companies showed a 3.3 percent fall in production, while the 21 largest independents saw a decline of 7.9 percent. Overall, Enron estimates that gas production for the quarter is 5 percent behind the year previous.

Technology, surprisingly, is counted as one of the culprits in the gas industry`s predicament. Today`s technology allows the gas to be taken out of the wells much faster, which creates a rapid decline in well production, driving the producer to drill more new wells, which also will only be big producers for a short while. With the falling production numbers, wells are running "flat out" all the time to meet demand, which also causes production levels to fall off quickly. Canada is experiencing the same trend. Although demand is rising, production in the United States has fallen slightly, and Canadian production has grown only fractionally over the past few years.