Natural gas set to displace oil on world stage

Gary Park
Petroleum News Calgary correspondent

With so much attention on crude oil's charge into the pricing stratosphere, natural gas has been relegated to the background despite making its own rally.

By mid-May on the New York Mercantile Exchange gas for June delivery hit a six-month peak of $6.40 per million British thermal units – a gain of about 30 percent in six weeks – as traders started eyeing a possible summer shortage.

The combination of a dry winter that could start to cut into hydroelectric power generation is sending jitters through the ranks of traders, given forecasts of a blistering summer, especially in California.

It also partly explains the buying spree for U.S. natural gas properties over the last month when premium values were attached to the reserves, reflecting a widely held view that gas supplies will remain tight until at least 2008 when the first significant wave of liquefied natural gas imports is expected, as well as the sharp rise in finding and development costs.

In its $2.7 billion offer for Tom Brown, EnCana paid an estimated $14 per barrel of oil equivalent for U.S. Rockies gas reserves, leaving in the lurch Kerr-McGee's $3.4 billion stock-swap takeover of gas producer Westport Resources, which was calculated at $11.90 per boe of reserves.

Those prices explain why EnCana Chief Executive Officer Gwyn Morgan emphatically believes that North America faces a gas squeeze over the next four years or longer.

Gas displacing coal and oil

It also promotes the notion that gas is displacing its old fossil fuel rivals – coal and oil – as the dominant source of energy in North America.

Peter Odell, a professor at Erasmus University in the Netherlands, told an energy supply conference in Alberta in March that gas will outpace oil over the next 20 to 30 years, resulting in an end to the three decades when power over oil moved from producers to the OPEC nations.

Currently gas and coal account for almost one-quarter each of world energy consumption, with oil claiming the other half.

Odell pointed out that it wasn't until recent times that explorers stopped throwing up their hands when they found gas.

For decades, millions of dollars of gas were burned off across North America by gas flares that once gave Turner Valley, southwest of Calgary, the title of Hell's Half Acre.

Odell said that gas will progressively displace oil in end uses such as transportation, setting up a "much more effective countervailing power against the power of OPEC. At that point gas producers should be in the driving seat."

Because of the massive infrastructure costs, the control over energy will be in the hands of a few companies, he said, noting that Royal Dutch/Shell is now poised to spend about $5.5 billion in the Persian Gulf state of Qatar to produce 140,000 bpd of gas-to-liquids output.

Among experts this is viewed as a vital step towards unlocking the world's stranded gas, especially the huge reserves in North Africa, Russia and the Middle East.