Originally created 12/15/03

Natural gas markets undergo turbulent transition



The U.S. natural gas industry is in the midst of a turbulent transformation as petroleum giants such as ChevronTexaco and ExxonMobil increasingly hunt fuel overseas, leaving smaller players scrambling to pick up the slack domestically.

The shift exacerbates an already constrained market in which supplies have been tight and prices high amid rapidly declining productivity in the nation's aging natural-gas fields, analysts and industry officials said.

Over the past two to three years, "there has been a major de-emphasis on the importance of exploration in this country" by the world's largest petroleum companies, said Rhone Resch, vice president of energy markets at the Natural Gas Supply Association, a Washington-based trade group. "That results in fewer new fields that are going to bring significant new supplies."

The transition has benefited smaller companies struggling to make up the difference as a result of high prices, boosting profits and stock prices. Yet it has come at the expense of homeowners and industrial users, who could see high energy bills for several more years.

Longer term, however, America will gain access to vast international supplies that should help ease the current crunch, analysts and executives said.

Indeed, as the biggest players expand natural gas production in countries such as Indonesia, Nigeria, Qatar and Russia to boost reserves and please shareholders, they do so with the understanding that a significant portion of this fuel will eventually be exported to America.

"That's what the future holds for natural gas," said Robert Ineson, a Houston-based director at Cambridge Energy Research Associates.

Trouble is, the United States currently has limited infrastructure to support the growing intercontinental trade for natural gas. To get it across oceans, the fuel must be cooled to its liquid state, shipped in refrigerated tankers and then "re-gasified," so it can be piped to homeowners, power plants and manufacturers.

There are just four U.S.-based terminals today that can receive tankers carrying liquefied natural gas, or LNG.

While roughly 30 new LNG terminals have been proposed and LNG imports are expected to quadruple by the end of the decade, it will be several years before substantial new capacity is added. Keeping up with rising demand between now and then will be tough, experts said.

Natural gas imports from Canada have been growing to compensate for the slide in U.S. productivity, but that safety net is gradually fraying, analysts said, because drillers there are also working harder every year just to keep output steady.

Today, the U.S. uses roughly 60 billion cubic feet of natural gas each day, with nearly 15 percent coming from Canada via pipeline and 2 percent from LNG. Demand for natural gas is expected to rise 14 percent by the end of the decade, according to Standard & Poors.

Ineson predicted there will be another "four to five years where things are going to be a little difficult."

With the price of natural gas soaring - January futures approached $7 per 1,000 cubic feet this past week - many companies are drilling aggressively.

Baker Hughes Inc., a Houson-based oil services firm, reported Dec. 5 that the number of rigs pursuing natural gas in the United States was up 38 percent from the year before. And that doesn't include the thousands of mom-and-pop operators, who are even more price sensitive, investing their limited resources in the nation's oldest and least productive wells.

Yet despite this surge in drilling, average daily production in the United States is on pace to decline by 2.8 percent in 2003, according to a Lehman Brothers analysis of 49 of the industry's biggest companies. Even the Energy Department estimate of 2 percent growth illustrates the magnitude of the industry's struggle to boost output.

The reduced drilling activity by deep-pocketed and technologically superior companies such as BP, ExxonMobil, ChevronTexaco and Royal Dutch/Shell is an important factor, analysts and industry officials said.

"You wouldn't see production falling as much and you wouldn't see as much pressure on prices" if major petroleum companies were more active, said Marshall Adkins, an oil and gas analyst at Raymond James & Associates in Houston. That doesn't mean they would be able to reverse the trend, though, Adkins said.

Compared with last year, BP's natural gas production in the lower 48 states fell 13 percent, according to Lehman Brothers. ExxonMobil's was down 10 percent, ChevronTexaco's slipped 11 percent and Royal/Dutch Shell's declined by 15 percent.

Officials from these companies say the process of selling off land leases in the lower 48 to smaller companies began when aging natural gas fields in Oklahoma, Texas, the Gulf of Mexico and elsewhere required significant investments every year just to keep production flat. There are still some attractive prospects, company officials said, but the more complicated technology required to extract the fuel is, for now, too expensive. Meanwhile, other untapped areas they would like to develop - in the Rockies, eastern Gulf and off the coast of California - remain off-limits for ecological reasons.

These factors - coupled with a sharp drop in the costs of making and shipping LNG - led the major petroleum companies to migrate overseas in their hunt for natural gas.

"We'll go wherever the opportunities are," said Alan Stuckert, public affairs manager for ExxonMobil's gas and power marketing division. "If we could drill in certain areas of the U.S., we'd be there."

Meantime, companies such as Apache Corp., Anadarko Petroleum Corp., Devon Energy Corp. and EOG Resources Inc., are boosting domestic production through a combination of new drilling and acquisitions.

"We're the fourth most active driller in the United States," EOG Resources chief executive Mark Papa said. "That's just staggering to me."

Based on footage drilled, ExxonMobil, which is 50 times bigger than EOG, is the 16th most active driller so far in 2003, according to RigData of Fort Worth, Texas.

"That's just an indicator of what's going on," Papa said. "It's got a lot of implications for the nation. We're probably in a period where we're going to have higher prices."