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Monday, December 3, 2012

Black and Veatch publishes gas industry survey with some surprising numbers

Global engineering, consulting and construction company Black & Veatch (B&V) surveyed natural gas industry participants in July and August, 2012 and has published its first Strategic Directions in the U.S. Natural Gas Industry report.

Here are some of its highlights:

Gas production in the Appalachian Basin, which includes the Marcellus Shale play, nearly doubled in 2012 – “a fivefold increase…in less than five years with no immediate signs of slowing.” There is nearly unanimous agreement among survey respondents that North America has sufficient levels of economically recoverable reserves to serve a growing market through 2030.

Current gas prices are at “unsustainable” levels for all producers and must eventually rise from below $3 per MMBtU (they were about $3.65 late last week) to between $4.50 and $6.00 by 2020.  Survey participants believe that demand for power generation - as well as an overall increase in demand from liquefied natural gas exports, petrochemicals and natural gas vehicles - will be the primary driver for higher gas prices.  However, respondents believe that significant increases in gas demand from electric generation won’t occur until the latter half of this decade, in part due to the industry’s expectation that meaningful climate legislation will pass by then.

B&V has estimated that gas prices below $6.00 MMBtu “will continue to provide power plant operators with capital and operating cost advantages over other power generation fuels and technologies.”  From an increasingly dire climate perspective, that is a number to watch.  The B&V estimate is much higher than the $2.50-$3.25 range that some analysts have said is the tipping point where gas will stop displacing coal and reducing carbon emissions in the U.S..

By a considerable margin, survey respondents ranked safety as the most important long term industry issue.

A significant percentage of North America’s transmission and distribution grid is nearing the end of its service life. B&V says that approximately 60 percent of natural gas transmission pipelines in the U.S. were installed before 1970, and gas distribution systems are typically between 50 and 100 years old. Yet aging infrastructure was ranked by gas survey respondents as only sixth out of 10 top issues.  

B&V noted that an August 2012 survey by Gallup ranked the Oil & Gas industry as having the least positive public image among 25 industries and business sectors.  Which leads us to the next subject – regulation.

Respondents think that regulatory compliance will become more stringent, particularly around hydraulic fracturing. Concerns related to hydraulic fracturing included immediate environmental impacts, impacts to land and water, seismic activity around disposal wells, and climate impacts of leaked methane.  However, the role of smart regulations like those promulgated by U.S. EPA seems to be recognized.  Tellingly, less than half of respondents believe that compliance costs related to gas production will result in modest price increases, and only a third believe costs of compliance could push prices substantially higher.

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