Testifying before the Joint Economic Committee of the US Congress, Cambridge Energy Research Associates’ (CERA) Dr. Daniel Yergin, said “The US is facing a critical five-year period in which, unless new steps are taken by consumers, industry and government, there is significantly increased risk of higher, more volatile natural gas and electric power prices, job losses, demand destruction and industry relocations.” Some key points from Yergin’s presentation are noted here.

It is clear that, without measures to boost supplies or temper demand, the market is locked in a strong price environment. Gas prices today have spiked to triple the average of the 1990s, and that is signaling what is ahead. The challenge lies between now and the arrival of substantial new volumes of LNG on North American shores. During this multi-year period, a tightening of the balance between supply and demand could lead to even higher and more volatile prices, i.e., an abnormally hot summer or cold winter could push prices well above recent levels, to the $6.50 to $8 per MMBtu range in the summer, and above $10 during a particularly cold winter.

The challenge before the industry, regulators and policy makers, and indeed the nation, is to manage a difficult market environment over the next few years while new supply arrangements can be made. Comparison of the US natural gas demand with the supply outlook creates a stark picture, according to Yergin. Demand is set to continue to outstrip continental supply, and the gap is set to widen.

The reason we are in a crisis is not that demand has surged, it is that supplies are stagnant. The Lower 48 US states have not been able to increase gas production for a decade. Productive capacity peaked at 55 Bcfd in 1994, and has been creeping ever downward, now standing at 50 Bcfd. In recent years, Canada has become a major source of natural gas, supplying 16% of present US consumption. However, Canadian production has flattened in recent years, and CERA expects only modest growth in Canadian production over the next several years which, combined with growing Canadian demand, translates into declining exports to the US.

There is strong evidence that simply adding more rigs will not solve the problem, as it has in previous decades. Yergin cited the experience of 2001 when the gas industry responded to wintertime price spikes by putting over 1,000 rigs to work, compared with 700 the previous year. This surge in activity yielded less than a 4% increase in US production, which eroded the following year. In 2004, onshore drilling has returned to record levels, but CERA expects US gas production to fall from 2003 levels. North American natural gas productive capacity is not expected to grow meaningfully, and US gas productivity capacity, like oil, is now in permanent decline.

At the same time, North America is set for a large increase in gas demand to fire electric power plants. In recent years, almost 200,000 megawatts of gas-fired power plants have been installed, equal to one-fourth of the country’s total installed capacity in 2000. Unfortunately, that natural gas demand growth in the power sector will come at the expense of more constrained industrial sector consumption.

By contrast, many parts of the world are awash with gas. Outside North America, global gas reserves are growing. Projects are now underway to bring these new resources to North America in the form of LNG. And there are huge quantities of stranded gas in Alaska, as well in the Canadian Arctic.

Yergin predicted that the bulk of North American supplies in the next 15 years will come from continued exploration and production in North America, with LNG playing an important role as the third major supply source after the US and Canada. Today, LNG provides 3% of US supplies. By 2020, that share could be 25% to 30%. However, the problem is that developing LNG supplies, as well as Arctic gas, requires long-lead-time projects. CERA estimates that the soonest LNG could provide significant price relief is 2008, with 2009 a more likely date. In addition, gas from the Canadian Arctic could reach the market by 2010, and Alaskan gas will not arrive until well into the next decade.