Introduction:

When one attempts to look into the future, it is often helpful to first look at the past for an indication as to what may lie ahead.  This certainly is true for the natural gas industry in the United States.

In 1980 the U. S. consumed 18.2 TCF (Trillion Cubic Feet).  At the end of 1980, the U. S. had proven reserves of 199 TCF.  High prices and limited delivery capabilities drove down the consumption of natural gas to a low of 14.8 TCF in 1986.  Also, in 1980 almost all gas produced in the U. S. was sold on long term, fixed price contracts.  During this time, those in the production segment of natural gas industry were pressing the Federal Government to "deregulate natural gas."  During the 1980's, we saw a move toward total deregulation of natural gas by the Federal Energy Regulatory Commission (the "FERC"), which culminated in Order 636, which made all interstate pipelines open for access by anyone.  (This move toward deregulation was,however, caused mostly by public pressure for the deregulation of all industries during the Reagan administration.)

During the 1980's, most of the long term gas sales contracts were ended, sometimes after bitter court battles and/or bankruptcy by the gas purchaser.  By 1989, an estimated 80% of all natural gas was sold on the spot market (usually one month contracts), and the trend toward short term sales agreements accelerated after that date.  Today, natural gas in the U. S. is predominately sold as a commodity, sometimes on an hourly basis.  Contracts for even one month frequently are pegged to one of the many published "Indexes."

As mentioned above, the producers of natural gas fought price regulation by the FERC.  It now is apparent that the regulators were the best friends the producers had -- they created shortages where none actually existed, which in turn held gas prices artificially high.  However, the market rejected these high costs and substituted energy conservation and alternate fuels for natural gas, which reduced the consumption some 19% from 1980 to 1986.  This forced the industry to restructure, to reduce its costs, and to improve its efficiency, particularly in the delivery system.

Conditions Today:

Today, the natural gas industry is much more efficient and has lower costs of operation in almost every aspect.  This has caused natural gas to become a very competitive energy source.  Costs for finding and developing natural gas are lower today than at anytime since the 1970's.  Even though there has been minimal expansion of the delivery system, it is far more flexible today with greater capacity and efficiency than ever before.  The addition of both market area and supply area natural gas storage in salt caverns has eliminated much of the shortages previously encountered during extremely cold periods.  Also, all phases of the industry have been able to significantly reduce labor and other costs.  This has resulted in a very competitive natural gas industry which can compete with all other sources of energy.

There has been a drop in the wellhead average price of gas from slightly less than $4.00 per million BTU in 1980 to less than $2.00 in 1995.  This has caused a dramatic rebound in the consumption of natural gas in the U. S., which reached its highest level in 1995.  Consumption in 1995 reached an estimated 19.4 TCF, up from 18.2 TCF in 1980, and from the low point of 14.8 TCF in 1986.  The industry  has done a marvelous job in re-engineering itself to be competitive in the future and has convinced its markets that it has adequate delivery capacity and, that adequate reserves exist for the foreseeable future.

The importance of storage proved itself during the bitter cold weather of 1995-1996.  The industry went into winter with a comfortable 3.0 TCF of gas in storage.  However, by the end of February, this had been drawn down to approximately 0.8 TCF, which is is essentially the cushion gas in storage.  Even though storage inventory was essentially depleted during the 1995-1996 winter, few interruptions occurred, and the amount of gas from storage apparently was sufficient.

Looking to the Future:

As the industry approaches the 21st century, there are several trends which are becoming apparent about the future of the natural gas industry in the U. S.  These include:

Availability:  Although proven gas reserves have declined from 199 TCF in 1980 to 164 TCF in 1994, the industry has produced 249 TCF during that period of time.  This would indicate that the industry is developing reserves only as needed, but in sufficient quantities to maintain the proven reserves and deliverabilty at an adequate level.

The industry has developed new technology which has reduced the cost of finding and producing gas reserves, and also has helped the industry find more reserves which could not have been discovered with technology available to the industry 20 years ago.  Examples of new available technology include three dimensional seismic data, horizontal drilling, and large data banks of geological information.  Also, computer hardware and software available today allows much better analysis of geological data.  This  means that gas producers can economically develop gas reserves as needed for many years to come in the U.S.

Imports:  Presently, natural gas imports to the U. S. are approximately 2.5 TCF for 1995, with most of the imports being from Canada.  Imports will grow slowly to the 4.5 to 5.0 TCF per year level by 2010 to 2015.  This will probably represent the maximum capacity which will be available from Canada.  Canadian gas will remain competitive with U. S. produced gas, so long as there are adequate gas supplies.  However, previous experience has shown that when gas is in short supply, then Canadian gas prices will rise sharply.  (While Mexico has, and will further develop large reserves of oil, most of the gas produced in Mexico will be associated gas with the oil production, and thus will be in limited supply.  Therefore, only minimal gas imports can be expected from Mexico.)  Imported LNG to the U. S. will not be able to compete with local and Canadian gas for the foreseeable future.

Pricing:  The average price of gas, adjusted for inflation, will remain stable for several years.  Today, there is a free market for natural gas in the U. S. which is controlled by supply and demand.  Barring any drastic change in either the supply or the demand, or the cost of finding and producing natural gas, there is little that will move the pricing.  Inasmuch as the industry has already streamlined itself and has eliminated most of its unnecessary costs, there will be few opportunities to further reduce the cost of finding and producing gas, or of reducing the delivery costs.  Also, there is adequate near term gas reserves, and presently the costs of additions to these reserves are relatively low, in the $1.50 to $1.75 per MMBTU range.

Peaks in prices for natural gas will, of course, continue to occur due to extreme cold weather.  However the magnitude of these peaks will diminish as the delivery system becomes even more efficient, and as more storage is developed in the vicinity of the major markets for natural gas.

Gas Consumption:  Gas consumption reached 18.851 TCF in 1994 and an estimated 19.367 TCF in 1995.  (Gas production was 18.852 TCF and imports were 2.462 TCF in 1994.  Estimates for 1995 were 19.267 TCF in gas production and 2.570 TCF in imports.)

While growth in gas consumption has been in the 2.6% to 2.8% per annum rate during the last few years, growth is expected to drop to 2.2% and then to 1.9% by the year 2010, at which time consumption will reach approximately 25 TCF per year.  Growth will drop even more after 2010, and consumption should not reach 30 TCF per year before 2025.
As mentioned above, the delivery system has become, and will continue to be, more efficient.  The efficiency improvement will not only include the physical movement and storage of the gas, but also the marketing, dispatching, controlling, and accounting for gas being delivered from the producer to the consumer.  Some aspects of the improved delivery system will include:

Gas Hubs:  A gas hub is an interconnecting point with several different inlet pipelines and several different outlet pipelines, along with metering equipment and flow control devices.  Its function is to interconnect many sources of supply with many markets.

While gas hubs are essential to the efficient distribution of gas from the most economical source of supply to each market, in order to function in that capacity, they must be strategically located, they must connect to an adequate number of pipelines, and the hub fees must be reasonable.  Although in the past two years there has been an attempt by various parties to develop over 50 hubs in the U. S.  Most will not meet one or more of the three requirements to be useful.  Therefore, there will be only 10 to 15 major hubs succeed, and the remainder will handle only small quantities of gas.  The majority of the gas produced will eventually pass through one of the 10 to 15 major hubs.

Gas Storage:  While the average consumption of gas in the U.S. is approximately 50 BCFD (Billion Cubic Feet per Day), the demand on a cold winter day may be in the 100 to 150 BCFD range.  Since the daily production and import capacity is only approximately 55 BCFD, the remainder of this demand must be met with gas which has been withdrawn from storage.  Older storage reservoirs were depleted oil or gas fields, which had limited withdrawal capacity.  These storage fields were normally used with a steady withdrawal through the heating season to supplement gas being delivered on-line through the pipeline systems.

In recent years, the industry has developed numerous salt dome caverns (and in at least one case, an abandoned, sealed coal mine) for the storage of gas.  Such storage has the advantage of rapid withdrawal and rapid filling.  They also can frequently be developed close to markets.  These storage installations can truly be used for "peak shaving", frequently with withdrawals occurring for only a few hours during a day, with recharging occurring during times of decreased demand, sometimes during the same day as withdrawal had occurred.

The development of these salt cavern storage facilities near major gas markets, has greatly improved the efficiency and dependability of delivery of gas to its markets.  Total storage capacity existing now in the U. S. is approximately 3.0 TCF.  It is anticipated that an additional 1 to 2 TCF storage will be developed in strategic locations by the year 2025.

Electronic Bulletin Boards:  On-line electronic bulletin boards have been developed by most pipelines on which participants may post available gas, transportation capacity, and the need for gas.  These bulletin boards have done much to bring buyers and sellers together;  however, since each pipeline has developed its own bulletin board, they are complex due to the many variations participants have encountered as they move from one bulletin board to another.

FERC Order 563 has mandated certain standardizations of the various bulletin boards, and there now appears to be a movement within the natural gas industry to standardize and interconnect all bulletin boards.  The industry now appears to be on the brink of developing one nationwide electronic data system interconnecting all gas suppliers, purchasers, and transporters.  Such a system would be similar to other automated trading system used for other commodities in the U.S.

Electronic trading of gas has shortened transaction times, which causes increased delivery capacity, better efficiency and accuracy.  It has also greatly improved the productivity of organizations which are engaged in buying and selling gas, and this in turn has reduced delivery costs.

Financial Hedging:  The volatility of the price of natural gas, particularly during times of high demand and peak deliveries, has created risks for both purchaser and seller of gas.  Sometimes these risks are greater than a purchaser or seller can afford to assume;  in other occasions, a purchaser may merely wish to stabilize his energy costs, or a producer of gas may only want to stabilize his cash flow to assure his banker that he can meet his debt service obligations.

For these needs of the natural gas industry, the financial industry has come forward with markets for futures contracts with which a producer, or consumer may "hedge" the cost of gas for a period of time.  These contracts for the future delivery (or purchase)of natural gas are being used increasingly by both buyers and sellers to either remove risk from their markets, or merely to stabilize the cost of natural gas.

The financial industry has also begun to offer more complex products which may be used to further hedge costs or income, and the more sophisticated marketers are now utilizing these instruments.

The natural gas industry will increasingly use these financial hedges to stabilize prices in the highly volatile commodity market for natural gas.  There will, of corse, continue to be a significant number of natural gas sales in which either the buyer or seller, or both, will not hedge their sales or purchase price, but these will be the specialized cases where there arereasons that one or both parties feel they have an advantage and do not want to hedge.

"Mega" Marketers:  There presently is a trend in the natural gas industry to merge gas marketing functions in an attempt to reduce costs through economy of scale, and to be able to furnish all of the gas needs for "mega" markets.  These consolidations seem to be accelerating.  Whereas a marketer who marketed 1 BCFD was considered to be a major marketer in the past, some of the new combinations of marketers will reportedly be marketing up to 5 BCFD of gas.

While "mega" marketers intend to achieve economies through volume, the challenge will continue to be the economical marketing of small quantities of gas from remote sources.  In these situations, the economical marketing of such gas will require aggregation with other such quantities, and the use of highly computerized trading systems and electronic bulletin boards for information discovery and gas flow scheduling.

Regardless of whether gas is marketed by a "mega" marketer, or by a small "niche" marketer, the market will continue to exert tremendous pressure on both to keep costs low, which will require ever increasing efficiencies.

In Conclusion, the past 15 years has seen an unprecedented restructuring of the natural gas industry.  The results have been devastating to many organizations who had been in the natural gas industry for many years.  Many have fallen by the wayside and no longer exist.  Others have restructured to a point that they are hardly recognizable.

However, after this painful shake up, the industry is now profitable, with a bright future.  It is in a position to compete very strongly with all other forms of energy.  If the industry continues to control its costs and further improves its efficiency, then the future for the natural gas industry and the use of natural gas as a major source of energy in the U. S. indeed bright.