ENERGY SECTOR DEVELOPMENTS REMAIN BULLISH
by Joseph Dancy, LSGI Advisors, Inc.
Adjunct Professor, SMU School of Law
October 15, 2007

The energy consulting firm of Groppe Long & Littell made a presentation to the Kansas Independent Oil & Gas Association last month on the outlook for the energy sector. Two charts prepared by that firm are worth reviewing:

WORLD OIL PRODUCTION 

• Note the explosive growth in global production from 1945 to 1970. Much of the oil and gas regulatory and legal structure was established during this period of explosive growth. 

• In 1972 the largest swing oil producer at the time – the State of Texas – saw excess productive capacity shrink to zero. The Texas ‘allowable’ – how much an operator could produce – was raised to 100%, the maximum legal limit.  

• Note the steep growth in production from both OPEC and Other Non-OPEC countries from 1985 to 2005, and the projected plateau and decline of production in Non-OPEC countries starting in 2005

• Liquids production from condensate and natural gas liquids increased substantially from 1985 to 2005. Without these incremental liquids the global supply situation would be much tighter.

• While global production is expected to peak in the 2010 time frame according to the presentation, global demand has been increasing at roughly 1.5% per year. Global economic growth and crude oil use are strongly correlated. 

• Long term trends in global supply and demand point to higher prices – possibly much higher prices.  

U.S. NATURAL GAS PRODUCTION

• Note that conventional onshore natural gas production in the U.S. peaked in the early 1970’s – about the same time U.S. crude oil production peaked. 

• Offshore natural gas production has declined the last few years, in part due to hurricane damage that permanently shut-in some of the offshore fields

• Note the explosion of ‘tight’ and coalbed methane production since 1990 – these are sometimes referred to as ‘unconventional’ natural gas reserves. 

• Much of the decline in natural gas production from conventional reserves has been mitigated in the last decade by the boom in the unconventional production.
• Many experts think the future U.S. natural gas production decline will be severe – which is why many planners expect imported liquefied natural gas (LNG) will play a major role in our energy future.

• Long term trends in U.S. supply and demand point to higher prices for natural gas

© 2007 Joseph Dancy
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Joseph Dancy, Adjunct Professor
Oil & Gas Law, SMU School of Law
Advisor, LSGI Market Letter
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