Natural Gas Surplus Bubble Could Disappear in 1987 / Natural Gas Moves to Forefront of Energy Alternatives as Industry on Its Own

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A supply/demand equilibrium in the natural gas market could be reached as soon as the winter of 1987-88, according to several industry analysts.

Another development expected to solidify the market in coming years is the emergence of natural gas as an industry on its own as it moves to the forefront of energy alternatives.

"The gas surplus will decrease because of the psychology that is prevalent in the marketplace: we have more gas than we know what to do with," said Sam Hammons, Oklahoma's representative to the Interstate Oil Compact Commission.

"The time is a function of the weather. It's a possibility this winter, but is more likely next winter," he said.

"We are seeing a time when we will have problems with some peak days," Hammons said.

Since very little domestic drilling is being done and people are not exploring for new natural gas reserves, the natural gas surplus bubble could disappear within the next two years, said David Bradshaw, vice president of Rauscher Pierce Refsnes Inc., a Dallas investment firm. This projection was made assuming no increase in the amount of gas used by consumers.

Rauscher Pierce Refsnes Inc. recently published a report recommending four natural gas exploration and production companies, including Noble Affiliates Inc. of Ardmore and Kerr-McGee Corp. of Oklahoma City.

The report projected a "dramatic decline" in gas reserves over the next three years, and companies with a heavy commitment to natural gas would reap the greatest benefit from the shift in reserve quantities.

"At the current drilling rates, in a couple of years, producers should be able to sell all the gas produced," said Bill Dutcher, senior vice president for the RAM Group of Oklahoma City.

Gas prices will be more seasonal as a greater portion is deregulated and not under long-term contracts, Dutcher said.

"Based on fundamental economics, the price of oil should move up in the early 1990s because the surplus from non-OPEC countries will be worked off," he said.

"At that point, the natural gas price will move up if it remains competitive, but it can't move up on its own."

Fuel oil would have a dampening effect on the price of natural gas because of the ability of large industrial users to switch to the cheaper heat source, Hammons said.

Even if a shortage of natural gas develops, Hammons said, the price cannot rise beyond a certain point where the cost of residual fuel would be lower.

As the gas bubble decreases, gas can compete more directly with oil on delivery, Dutcher said. If oil prices rise to $18, then the price of natural gas at the wellhead can be sold for $2.25 to $2.50 per thousand cubic feet.

If the price of natural gas does move up, it is still blocked in by the competition from the price of oil. Natural gas prices will not get back up to $3 or $4 per thousand cubic feet because the oil price is not there, Dutcher said.

Pipeline companies are already trying to lengthen the terms of contracts because of the price, Bradshaw said.

"The relative movement is toward firming up longer term contracts and longer term supplies," Bradshaw said.

"Natural gas is becoming its own industry," said Vinod Dar, president and chief executive officer of Hadson Gas Systems Inc. of Oklahoma City.

It is definately becoming its own industry, he said, because of the way natural gas is transported and marketed.

As an industry, natural gas is separate and unique, but the price is set by what happens in the oil market, said Dar.

"In terms of the price, gas can't be decoupled from oil," Dar said.

"One third of the gas market is tied to the price of oil. …