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Natural Gas At Crucial Juncture

by Scott Haggett, Calgary Herald, www.canada.com, February 23, 2004

Natural gas supplies are waning, prices for the fuel are rising and relief is at best years away.

After years as a low-value commodity, natural gas has ascended into the spotlight as demand for the fuel to fire power plants, heat homes and serve as a chemical feedstock outstrips the petroleum industry's ability to tap new reserves.

That imbalance has forced up prices and caused many observers, including Alan Greenspan, the influential head of the U.S. Federal Reserve, to wonder whether a natural gas shortage has the potential to devastate the economies of the U.S. and Canada.

The future of the natural gas industry will be at question at a Canadian Energy Research Institute (CERI) conference being staged in Calgary next week. Its themes echo the concerns of both gas suppliers and consumers on how the North American energy industry can meet demand and whether unconventional alternatives like liquefied natural gas (LNG) or coalbed methane will be able to plug supply gaps.

"The markets are really at a crossroad right now," says Paul Mortensen, director of natural gas supply at CERI.

"If we go one direction we could go back 20 years to the late 70s or early 80s when gas prices were high and gas was viewed as a premium fuel.

"Or are there opportunities for us to grow supply both within North America and from frontier areas or LNG that will get us back on the track of industrial and power growth?"

Natural gas reserves are declining in North America. Many gas producers are finding it difficult to tap new reserves to offset declining production from existing fields.

While many hope that new supplies can come from Alaska, the Mackenzie Delta or areas like the ultra-deep waters of the Gulf of Mexico, the reality is that those areas won't be producing for a number of years.

"We're going through an interim period that's going to be critical," Mortensen says. "What prices are going to do, how much hardship will the consuming sector be under and if there will be market support for high-cost projects are subjects we'll be looking at."

Natural gas prices have been uncharacteristically high over the past few years. In 1999, the benchmark price of natural gas on the New York Mercantile Exchange averaged $2.32 US per million British thermal units. That was less than half the $5.49 US that gas averaged over 2003. That price rise has squeezed industrial users like the petrochemical industry and could threaten jobs.

Rather than invest in North America, many petrochemical companies are choosing to locate new plants in areas like Trinidad or the Middle East, where gas is plentiful and cheap. A gas shortage, Mortensen says, "has tremendous implications for employment or industrial growth. It's an issue of how much investment (a company has) in North America, how efficient are you and can you weather the storm?"

Mortensen says industrial-gas users that haven't invested in their business will likely be hardest hit.

Those firms that have the most efficient technology and the newest infrastructure should be able to survive high prices.

Those with aging plants may be forced to find alternative ways to stay in business, if indeed they can.