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Americans guzzling the gas

While crude-oil prices are calming down, natural-gas prices in the United States are poised to stay strong. And unlike with oil, there are no big natural-gas producers who can fix the problem.

The economic recovery and proliferation of natural-gas-fired power plants continue to rev up demand for the fuel.

But energy companies are not keeping up. In fact, they are struggling just to maintain supplies, which may make natural gas vulnerable to an unprecedented price increase in coming months.

Natural gas is expected to remain expensive for the next year. It has cost more than $US5.50 ($7.98) per million British thermal units nearly all year, and last month, traders on the New York Mercantile Exchange bid up contracts for the next 12 months to an average price of $US6.75 per million British thermal units, a record.

Though both near- and long-term prices have retreated along with crude oil, they still remain high.

Oil prices began to come down after the Organisation of Petroleum Exporting Countries (Opec) this month pledged to increase production in order to curb crude-oil prices.

Saudi Arabia, Opec's most powerful player, has about a quarter of the world's oil reserves and has not begun to tap them all.

Natural gas producers cannot drill their way out of their problem. North America natural gas reserves have been slowly declining since the 1980s, and the low-hanging fruit has been plucked.

Importing natural gas is difficult, in part because only a limited number of terminals can accept gas that is super-cooled to be transported.

Instead, the biggest natural gas producers in the US are mostly rearranging the furniture - buying each other to get at prized reserves in the Rocky Mountains rather than spending their cash on new prospects.

On a different tack, Anadarko Petroleum last week said it would sell a quarter of its producing properties in North America, putting them in the hands of smaller companies with less financial ability to rejuvenate ageing fields. Meanwhile, Anadarko plans to redeploy much of its efforts into faster-growing, more promising regions overseas.

Currently, more than 1000 rigs are drilling for natural gas in the US, close to the 2001 high, and about another 200 are active in Canada, according to Baker Hughes, which has been tracking natural gas rigs since 1987. But even those that want to increase activity to capitalise on high commodity prices are finding the raw materials are not necessarily available.

"What we see currently and what we see over the horizon in the next year or two is at best in North America a flat-supply scenario," says Darryl Smette, a senior vice-president at Devon Energy Corp, the largest US independent producer of natural gas.

"Over the past three or four years, the wells we are drilling in North America have tended to find fewer reserves with greater declines when those reserves start producing," says Smette.

Overall, reservoirs in North America tend to be inferior and smaller, driving up the cost of production, says Steven Shapiro, executive vice-president of Burlington Resources. "The rig count is fairly high, but the productivity that we're seeing out of those rigs is not as high."

However, with higher prices, companies are now focusing on fields that once were passed over because costs were too high. Burlington Resources, for instance, is developing new reserves in central Wyoming's Madden Field.

The gas is nearly twice as deep as conventional wells and is under extraordinary pressure. Drilling could take nine months and requires specialised services to make sure the pressure does not blow out the pipe.

The result of these trickier wells, in Madden and elsewhere, is that the search for natural gas in North America has become markedly more expensive. From 2001 to the end of 2003, the three-year average finding cost for natural gas was $1.53per million British thermal units, up 29per cent from the three-year average the year before, according to a recent analysis by Bear Stearns. Costs are continuing to rise: in 2003, the average finding cost was $1.73 per million British thermal units.

With new gas so hard to find and so costly, companies that want to show growth are prospecting on Wall Street. In April, Kerr-McGee spent $2.5billion to purchase Westport Resources, the first of three deals that included EnCanaCorp acquiring Tom Brown.

The trend continued last week when Petro-Canada snapped up Prima Energy for $US534million. Part of the reason behind the recent spate of acquisitions is that it is cheaper to buy known reserves of natural gas than it is to explore for new ones.

But by pouring cash into acquisitions, energy producers are merely swapping reserves, not adding new reserves.

Bear Stearns analyst Ellen Hannan noted in a recent report that in 2001, the last time more than 1000 rigs were drilling for natural gas in the US, companies replaced 97per cent of the reserves they took out of the ground with new finds, essentially keeping the cupboard stocked for future years. In 2003, companies replaced 84per cent of the reserves they took out of the ground.

The largest producers of natural gas in the US - such as BP, ExxonMobil, and ChevronTexaco - found new gas to replace only 52per cent of the gas they extracted. "These results should be of major concern for consumers of natural gas," Hannan says.

Editorial Notes: In the first paragraph the author assumes, perhaps incorrectly, that Saudi Arabia is not already pumping flat out.

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