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|  | DECEMBER 24, 2003
Natural Gas: "High and Volatile" Apache CEO G. Steven Farris says it will take fresh sources of supply to stabilize the market -- and that could take five years For years, natural gas had hardly any market, making the fuel plentiful and cheap. But over the past decade and a half, it has become increasingly popular. With demand from new power plants growing and industrial uses increasing, natural gas now meets 25% of the country's energy needs and is the nation's fastest-growing major energy source. Yet production has lagged behind demand. For example, the federal Energy Information Agency estimates that natural gas demand will rise about 1% in 2004, while production will fall 1.5%. Natural gas now sells for more than $6 per 1 million British thermal units (BTUs), more than twice what it brought for much of the 1990s. With few new sources of production on the horizon for five years or so, supplies are expected to remain tight and prices relatively high. G. Steven Farris, President, CEO, and COO of Apache (APA ), recently spoke with BusinessWeek Dallas Correspondent Stephanie Forest on the outlook for the natural gas sector in 2004. Houston-based Apache is one of the world's largest independent oil and gas exploration and development companies, with core operations in the U.S., Canada, Egypt, the British North Sea, and Western Australia. Edited excerpts of their conversation follow: Q: What's your outlook for the natural gas market in 2004? A: North American gas supplies remain tight, and we don't expect much help from the supply side next year [2004]. First, there are the rapid [production] decline curves, especially in the Gulf of Mexico, as we continue to exploit mature areas. Second, most companies have learned from past experience that in our volatile gas-pricing environment, people will be cautious in their spending. Overspending in the past has led to unsustainable increases in service costs and price drops. The one big factor over time that could help the supply-demand imbalance is demand destruction, [but] that is not good for the industry, the environment, or the economy -- especially as manufacturing jobs are shifted overseas. Another longer-term factor that will eventually help supply is liquefied natural gas [LNG], but it will take some time to [develop] the infrastructure. So overall, gas prices are likely to remain relatively high and volatile. Q: What trends, if any, do you expect will emerge in 2004? A: More progress toward establishing LNG infrastructure in the U.S. Continued consolidation of the oil and gas industry. Continuing increases in overseas investment by the E&P [exploration and production] sector. Q: What challenges will the natural gas markets face in 2004? A: The biggest challenge continues to be price volatility and demand destruction due to high prices. Q: What's the outlook on natural-gas prices for 2004? A: We don't predict prices because such predictions are inevitably wrong. But we do expect gas prices to remain strong, though perhaps not at these lofty levels, which have a lot to do with the season and with larger-than-expected storage withdrawals. Q: Do you expect the energy bill to ultimately pass in coming months? A: Probably not in an election year. Q: If by some chance it were to pass, what if any impact will it have on natural gas markets in 2004? A: Very little, other than efforts to improve transparency, reporting, and accountability in the gas-marketing sector. The energy bill contains the only congressional response to the Enron-type gas-marketing scandals. It would eliminate the Enron exemption from the Commodity Futures Trading Commission oversight. The bill would also require the Federal Energy Regulatory Commission to develop a verifiable system of price reporting to the indexes, including making reporting of gas transactions mandatory. That would help with transparency and confidence in the market but probably won't have much of an impact on gas supply in North America. Q: What's your outlook for the oil sector in 2004? A: The outlook for oil is also uncertain, in light of conflicts in the Middle East and terrorism and its impact on getting Iraq's production up and running without disruption. The former Soviet Union has huge petroleum supplies, but it will take some time for inefficiencies in that area to be overcome to the point where [those countries] can have a major impact on supplies again, though they are moving in that direction.  Edited by Patricia O'Connell
BW MALL
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