Pipeline &
Gas Journal
March issue 2000:
INGAA Foundation
Electronic Revolution Spurs Gas To New Heights
by Jeff Share, Editor, Pipeline & Gas Journal
The phenomenal growth of the computer age will be a key force that will ultimately drive the natural gas industry to record heights, says a leading natural gas analyst.
Ronald J. Barone, managing director for PaineWebber, told the recent Interstate Natural Gas Association of America’s Foundation’s Tenth Annual Meeting at Ponte Vedra Beach, FL that a pressing need exists for additional electric generating capacity and will accelerate because of the booming Internet and e-commerce markets. The data transmission market, which is estimated at $9 billion, will surge to $65 billion by 2004, he predicted.
“This is not going to develop without electricity and that is not going to happen without natural gas,” Barone told his audience of natural gas executives, contractors and suppliers. Most experts are forecasting a 3 percent annual increase in natural gas use and that will be driven by power generation, he said.
The deregulation of the gas industry, coupled with its convergence with electricity, has been timely in helping gas companies plan for future growth, said Barone and David N. Fleischer, managing director, Global Investment Research for Goldman, Sachs & Co.
With reserves declining and production increasing, they discussed the challenges of supply keeping pace with demand, which is expected to reach 30 Tcf annually between 2010 and 2015. It depends on how fast the industry wants to get there, they said.
“Most people see it as a supply challenge. I don’t,” Fleischer said. “I see it more as a challenge of just getting the infrastructure and the markets and have people believe the supply is there. I know they can come up with the supply, although that is not the general perception.”
The 30 Tcf goal is a “very noble goal” which the industry must take aim at because it will have major ramifications on health, social and economical issues in the U.S., Barone said.
“It can be done, but it’s not going to be a walk in the park,” he said. “It’s going to take a lot of dollar investments in infrastructure and prices have to be high enough so there’s an attractive return for producers to put up the money to drill. The pipelines are going to have to expand and the Federal Energy Regulatory Commission cannot give skimpy returns on equity. They have to realize that there is one capital market out there that pipelines have to compete for. The S&P 500 is earning 20 percent returns on equity; why invest in a pipeline that’s only earning 11 percent? They shouldn’t. They won’t,” he said.
Producers are increasing drilling efforts but are hampered by bankers who are requiring them to pay down some of their debt before loaning them more money. The fact that oil prices have risen dramatically since last year’s downturn has been encouraging, Barone said.
Another problem arises from the continuing mergers among major oil companies. Those result in combined exploration budgets considerably smaller than individual companies added together, he said.
Barone credited the FERC with moving in the right direction, especially compared to the National Energy Board in Canada where pipelines are angry over being allowed only 9 percent return on equity. “With the S&P 500 and the NASDAQ doing what they’re doing, why would you invest in a Canadian pipeline for a 9 percent return?”
Over the next decade, the analysts predicted that the industry will be dominated by a dozen electric and gas giants, with gas leading the way.
Fleischer said gas companies are in a better position to leverage their gas knowledge and take it into the electric realm. “Everyone needs to arbitrage gas and electricity and find ways to convert one fuel into the other to market to customers. It’s a lot tougher for the electric companies to create the same sort of capability whether they’re buying a gas company or just investing in those capabilities. It’s going to be very hard to build a non-regulated marketing presence for those electric companies.
“Customers essentially want to have the lowest cost energy - heat and light - so that’s a challenge to all of these companies and there’s no one answer as to how you get there. Going out and just buying gas company assets or merging is not the solution. It’s the start or one approach to the solution.” P&GJ