Remarks to the Houston Pipeliners Association, Jan. 3, 2011

January 2011 Vol. 238 No. 1

Jeff Share, Editor

It’s great to see you tonight and I hope you all had a hearty holiday season. We have a two-part program tonight. I’m going to talk about some of the dynamic changes under way in the natural gas business and then a few minutes on some key issues the industry is facing this year. I’ll be throwing a bunch of numbers at you – the point being that no matter which way you look, the natural gas business is the one to be in right now.

Then Robert Carpenter, editor of our sister publication Underground Construction, will discuss several pipeline projects that you’ll want to hear about.

Today no discussion about natural gas is complete without mention of shale. This is something that really has revolutionized the industry and hopefully will have an impact on the industry and the country well into the future.

Because of the shale deposits – and there are now 22 producing locations in more than 20 states – along with the doubling of LNG plants, and record rates of growth in new pipelines and storage sites, the supply of natural gas in the past couple of years has shown a 39% growth in the nation’s resource base. It has grown larger and more sustainable than at any time.

No longer is natural gas being talked about as a so-called bridge fuel to renewable. Now it is being seen as a sustainable long-term solution for the economy and the environment. So this is not the market of 10 years ago. In addition to the supply, pipelines and storage capacity are allowing the industry to respond to customer needs faster than ever with greater flexibility. And what we all know and are trying to teach lawmakers – is that natural gas requires only a fraction of the land necessary to produce the same amount of energy as other fuel sources, with correspondingly low emissions.

Updated projections from the federal Energy Information Administration through 2035 show the growing importance of shale gas in meeting energy demand and lowering natural gas prices.

Some key findings:

A higher updated estimate of shale resources supports increased natural gas production at prices below those in last year’s EIA Outlook. The technically recoverable unproved shale gas resource is 827 Tcf, 474 Tcf larger than in the previous year. This should double annual shale gas production from 6 to 12 Tcf by 2035. One result is that by 2035, the net import share of total U.S. energy consumption is estimated at 18%, compared with 24% in 2009.

Non-hydro renewables and natural gas are the fastest growing fuels used to generate electricity though coal remains the dominant fuel because of the large amount of existing capacity. However, EIA does not project any new central station coal-fired power plants beyond those already under construction or supported by clean coal incentives.

Overall, U.S. energy consumption will jump 21% by 2035 and the cheaper price for natural gas, along with relatively low capital construction costs, makes it more attractive than coal so we’ll see more a lot more gas-fired plants built. The share of electricity from renewable sources such as hydroelectric dams and solar panels will rise to 14% in 2035 from 11% in 2009. Natural-gas electricity generation by 2020 is 29% higher in the 2009 outlook. Look for other renewables to take a hit, particularly wind turbines.

The share of generation from natural gas increases from 23% in 2009 to 25% in 2035. Average annual Henry Hub natural-gas prices, in 2009 dollars, are predicted to be $4.80 per million Btus in 2015, $5.18 in 2020 and $7.19 by 2035. Last year’s forecast for prices in 2035 was $8.88. Most natural gas prices I’ve seen for 2011 are $5.20 for natural gas and $82 for a barrel of crude. Production is expected to ease later this year and should relieve some of the pressure on natural gas demand and prices.

Industrial natural gas demand continues to recover, reversing recent trend, growing from 7.3 Tcf in 2009 to 9.4 Tcf in 2020, thanks in large part to the relatively low natural gas prices. Natural gas consumption rises 16% from 22.7 Tcf in 2009 to 27 Tcf in 2035. The total in 2035 is about 1.6 Tcf higher than was estimated last year.

Oil prices are rising as the world economy recovers and pressure from growth in global demand continues. By spring we’re seeing forecasts of $3.25-3.75 a gallon. Last week former Shell CEO John Hofmeister predicted gasoline pricess of $5 a gallon in 2012. In 2035, the average real price of crude is estimated at $125 per barrel in 2009 dollars with world consumption rising from 84 million bpd in 2009 to 111 million in 2035.

U.S. crude oil production increases from 5.4 million bpd in 2009 to 6 million bpd in 2019 then declines slightly through 2035.

How strong has the shale play been? Upstream M&A expenditure in U.S. shale gas totaled $21 billion in the first half of 2010 – equivalent to one-third of global upstream M&A spend during the period. This level of activity is set to continue over the next couple of years, dominated by the large caps and majors. Exxon’s purchase of XTO was historic because where the majors go, everyone else follows.

One item you may have overlooked in the new tax bill extends support for natural gas fuel for transportation which will be a big boost for NGVs. This will extend the 50-cents per gallon excise tax credit retroactively for calendar year 2010 and through 2011. It also extends tax credit incentives for developing natural gas fueling infrastructure.

There are only about 150,000 NGVs in the U.S. compared to 12 million worldwide. But several major manufacturers have introduced natural gas-fueled trucks over the past two years including waste haulers who are converting their fleets to natural gas, and about 25% of the nation’s transit fleet relies on natural gas. For consumers, Fiat, Europe’s largest maker of NGVs, plans to bring them to the U.S. for sale through its Chrysler dealer network.

A few other comments I want to make:
1. Cap and trade is gone.
2. More M&A activity looms in the service sector – pigging seems like a prime target for consolidation. I can see Schlumberger moving into this sector. Then you have to wonder what GE’s next move is going to be since their oil and gas division has been among its most profitable in recent years.
3. Short-term Stimulus projects that can find repair work or even some construction.
4. Clarity toward an energy policy: while there will be a continued push to renewables because it is politically popular, there is also a realization that we’ll remain dependent on fossil fuels for years to come. There is a real need to support an overall public policy for natural gas regardless of what party is in power. The day after the midterm elections, President Obama made clear that natural gas is one of the areas that his administration and the Congress can work together on.
5. There’ll be some interest in nuclear – though the EIA forecasts just five new plants being built – along with cleaner-burning coal.
6. Look for an answer very shortly from Hillary Clinton’s office on the Keystone XL project which will be at least some indication that the administration realizes that continued North American production of oil and gas is essential for our security and overrides some environmental concerns. We should also get a pretty good indication of the future of the Alaska gasline project this year, depending on what if any agreements are finalized by the transporters and producers.

What’s ahead?
1. Thanks to the boom in unconventional natural gas production supplies are more than abundant but we’re not seeing demand keep pace. On the plus side we apparently are seeing the end of price volatility of natural gas and that could make planning much easier for heavy users such as electricity generators and feedstocks.
2. As more and more coal-fired power plants are retired and nuclear energy remains in limbo, we might see more generators switching to just natural gas or using it as a primary fuel with coal as a backup. This is especially important in the Northeast which has traditionally depended on coal as its chief power source.
3. Do we have the infrastructure in place that is necessary to transport these increased supplies of natural gas to homeowners, industrial and power generators?
4. Will the pipeline industry be able to rely on Wall Street for the capital required to build new facilities or will they team up with non-traditional partners to fund projects?

Safety Reforms
1. New Pipeline Safety Reform bill will require Integrity Management programs for both intrastate and interstate pipelines to expand beyond High Consequence Areas and use inline pigging as the preferred inspection method rather than ECDA.
2. There will be a higher cap on civil penalties and more federal inspectors.
3. Gathering lines will most likely also be subject to federal safety rules for the first time.
4. Will Congress try to exercise more control over the shale plays?
5. How many different agencies are going to regulate some pipelines?
6. Will government officials demand to see exactly how information is shared between operators and their service providers?
7. With foreign companies now supplying more products such as steel pipe, are the quality standards of U.S. companies being met?
8. Will companies be able to ask for a rate increase because work that needs to be done, and then not do it?

A. Will Congress do more in addressing problems in one-call laws and programs?
B. Will the EPA moderate its guidelines for reporting greenhouse gas emissions?
C. Can the industry take it upon itself to set higher overall safety standards for all rather than rely on each operator making its own self-evaluation?
D. Can we make local governments more aware of the location of existing pipelines when planners are looking at new development?
E. Can the industry be less secretive in discussing the work it does in maintaining safe operating systems?

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