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[Jagman]

THE GREAT GAS SHORTAGE
by Elliott H. Gue
Editor, The Energy Letter
January 20, 2006

Throughout the 1990s, roughly 90 to 95 percent of all new power plants constructed in the US were natural gas fired. The conventional wisdom was that North America had plenty of natural gas to satisfy demand.
After all, total proven gas reserves for North America stand at roughly 260 trillion cubic feet while annual consumption is on the order of 2.75 trillion cubic feet. A simple back-of-the-envelope calculation suggests nearly a century's worth of consumption. That certainly compares favorably to the crude oil market, where more than 10 million barrels per day--more than 3.6 billion barrels annually--of North American consumption must be covered by imports from abroad.

But the truth about the natural gas market should now be apparent. North America doesn't have enough gas production to cover current demand; natural gas isn't the panacea that many promoted back in the ‘90s. Even a rather temporary disruption, such as we saw in the Gulf of Mexico last fall, is enough to prompt a massive spike in gas prices.

Some power producers bought the gas story hook, line and sinker in the ‘90s and built huge gas-fired power plant capacity. Those companies are now feeling the pinch of higher commodity pricing. Calpine Corp, for example, recently was forced to declare bankruptcy even though demand for power remains strong in the US.

Natural gas isn't just a US or North American issue. Europe, too, is dangerously dependant on gas-fired power generation and Asia faces emerging supply constraints. Check out the chart “The Global Gas Crunch.”




Source: BP 2005 Statistical Review

This chart depicts the difference between natural gas consumption and production for several different regions of the world. North American gas consumption only exceeds production by roughly 3 billion cubic feet per day. The US is quite obviously the biggest consumer in the region, while Canada has traditionally had excess production to export to the US market.

The North American gas problem is getting bigger. Canada's gas production is at or near its peak; US gas production has already peaked. Unconventional gas sources, such as Texas's Barnett Shale, will make the speed of production declines rather shallow. However, rapidly rising demand in both Canada and the US will necessitate rising imports of gas from abroad. That spells rising imports of liquefied natural gas (LNG) in the coming years.

To calculate Europe's gas gap, I excluded Russian production (and consumption) of gas. Here we can see that the European gas gap is much larger than America's--nearly 24 billion cubic feet of gas per day must be imported into Europe to meet demand.

The vast majority of that supply comes from Russia, a country with the world's largest reserves of gas. Much of this gas can be transported by pipeline into Europe.

But recent events show that Russian supply disruptions can produce some major headaches for all of Europe. Early in 2006, Russia reduced the flow of gas through Europe's most important pipeline as a result of a pricing dispute with the Ukraine. This resulted, however, in significant reductions in gas flows into Western Europe. It's widely suspected that the Ukraine “stole” Russian natural gas during this dispute.

More recently, Russia has once again reduced the flow of gas through the pipeline. This time, the reason is not political but weather-related: While the US is enjoying a mild winter, Europe is experiencing a record cold snap. Moscow has seen several days of temperatures as low as –30 degrees Fahrenheit. Budapest, Hungary and Vienna, Austria, among others, have seen temperatures consistently 10 to 20 degrees below normal.

The problem is Russia's demand for natural gas has been steadily rising as temperatures fall--demand for heating is on the rise. That means some of the gas that would normally be exported to Europe is instead being consumed domestically. Hungary, for example, is reporting gas volumes 20 to 25 percent below normal while Italy is reporting roughly a 10 to 15 percent volume drop-off. Meanwhile, both Italy and Hungary have seen huge jumps in demand for gas this winter amid unseasonably cold weather.

This situation is exacerbated by Russia's own gas price controls. As domestic natural gas prices are heavily subsidized in Russia, domestic demand for natural gas is likely far higher than it otherwise would be. Nonetheless, it's pure folly to think that Russia won't cover her own gas needs ahead of the European Union's.

Finally, we come to Asia. Asia's position is currently rather similar to America's. While the gas gap isn't that large in real terms, it's growing rapidly. Japan, India and China are already major importers of gas and rapid economic growth in the latter two countries spells steadily rising demand. China recently announced that it's quite unlikely to meet its targets for new natural gas plant construction. The reason is simple: The country doesn’t have enough import capacity to satisfy gas demand.

There are two implications of the global gas crunch. One, natural gas is fast becoming, like oil already is, a globally traded commodity. Gone are the days when a region such as North America or Europe could look at natural gas as a domestic market. This means that India, China, Europe and the US will be competing for the same global supplies of gas. This spells higher prices and will be a boon to companies (or countries) with large reserves of gas for export.

And two, the naïve view that we can rely on clean burning gas to meet all the globe's power needs has been exposed as farcical. This opens the door to other fuels. In particular, I see turmoil in the natural gas markets as a major catalyst for nuclear and coal-fired power.


© 2006 Elliott H. Gue
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