Natural Gas Production, Meeting Future Energy Needs

With the ongoing global geopolitical challenges over energy matters, the location of natural gas production is clearly a significant factor going forward.

It seems that where most of this hugely important energy commodity is consumed is some distance from its production sources.

Over the 10 years to 2007 world natural gas production increased 31% from 2,236 billion cubic metres (bcm) to 2,940 bcm, according to the BP Statistical Review of World Energy 2008.

While the Middle East witnessed a doubling of its production from 175 bcm to 356 bcm, and Latin America saw an 82% increase in output, North America only recorded a tiny 5% increase for the same period.

Interestingly, Africa posted a 92% increase in natural gas production, while Europe and the former CIS states advanced 20%, with the Russian Federation, also the largest producer in the world (20.6%), dominating this region.

The USA (18.8%) is the second largest producer in the world, but given that its reserves fell 5% over the 20 years to 2007, it is clear that America will not be able to maintain this high output level for much longer unless it discovers major new sources of natural gas.

A look at the reserves to production ratio (R/P) shows that the US has only around 10 years of supply if current production levels are maintained.

The market determines natural gas production levels and if supply does not meet the current and short to medium term demand, then this will be reflected in an increase in spot price, and futures contract prices traded on the NYMEX and ICE Futures Europe.

Factors that can affect natural gas supply

• When prices are relatively low exploration and drilling investment projects will be cut back, while when prices are rising there is a time lag before new capital is invested to bring new plant on stream.
• In the US both interstate and intrastate pipeline infrastructure requires further investment to enable the gas produced and imported to reach the anticipated higher demand going forward.
• Adverse weather conditions, such as a hurricane in the Gulf of Mexico, can lead to platforms being damaged and pipelines being closed. This choking off of supply is likely to cause disruptions in the distribution system. Prices are likely to spike to reflect the reduced supply.
• With lower prices there has been a tendency for some workers to leave the industry, but when prices strengthen, which is a signal from the market to produce more gas, there can be problems finding the people with the proper qualifications. This is inevitable with a commodity where the price action is quite volatile over months and years.
• It can take time to get permission to explore new concessions and to start drilling and put delivery infrastructure in place. As a result supply is curtailed and prices can rise sharply until the gas comes on stream and price stability is achieved.

Looking to the longer term

The Energy Information Administration (EIA) reckons there are significant untapped reserves of natural gas available in the USA, which could potentially enable the country to maintain its current production levels for longer than the estimated 10 years.

Add to this the major programme of investment in liquefied natural gas (LNG) terminals which will handle the extra imports from countries like Qatar, Algeria, Oman and the United Arab Emirates, and there should be sufficient supplies going forward.

Of course there are always planning, environmental and safety issues to overcome with LNG facilities, but the industry can point to an excellent safety record to date.

In Europe, supplies are mainly distributed from the Russian Federation and the Caspian Sea by large pipelines, and from parts of North Africa such as Algeria and Libya.

The UK has become a net gas importer as North Sea gas production levels tail off, and there are significant and growing levels of LNG imports to meet the expected increased demand.

Commodity markets will continue to reflect the tight dynamics between natural gas production, demand for this resource and the latest proven reserves through the price action of futures contracts on the major exchanges.

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