Almost a year and a half has passed since FERC issued Order 745, declaring demand response to equal to power supplies in wholesale markets. Yet uncertainty surrounds the order’s implementation,...
The Wonderful Curse
Production constraints and demand pressures mean high gas prices are here to stay.
2003 boosted confidence in this view, as did the perception the Gulf of Mexico production region could be vulnerable to repeated hurricane damage. Analysis of the current period and the previous transforming market period confirmed:
• Crude-price Sympathy: A projected average 7.5-to-1 WTI/HH price ratio during this period maintains much of the increased value of gas relative to oil gained in the prior period;
• Security Premium: Petroleum prices include a premium for increased world tension and geopolitical security risks;
• The China Factor: Strong demand growth in several large developing countries, especially China and India, are driving higher global prices of hydrocarbon fuels, including crude-oil products, LNG and coal;
• E&P Inflation: Gas finding and development (F&D) costs are rising across North America;
• Gulf Depletion: Drilling in the Gulf of Mexico is declining despite record high prices; and
• Gas-Turbine Glut: The current generator overbuild is now resulting in predetermined increases in electric-power fuel demand.
The combination of these market factors has resulted in a permanent rise in gas prices, rather than prices spiking up and then returning to lower, long-run equilibrium levels. Crude-price sympathy, security and scarcity premiums, and a very bullish market perception have caused Henry Hub prices to trade well above long-run replacement cost. The price forecast for the next 48-month period takes these factors into account.
Recent oil and gas profitability is well above long-term industry norms, which supports the view that gas prices have risen significantly faster than increases in finding and developing costs. Oil and gas producers might be expected to continue increasing their capital-spending programs in the coming years in an attempt to grow production volumes. That growth will be tempered by several factors, namely: barriers to entry; the long lead times necessary to bring new gas reserves into production; and the high decline rate of both current producing wells and of expected lower-quality new wells. As a result, actual growth in production, if at all, likely will be gradual at 1 to 2 percent per year.