By Myra P. Saefong
TOKYO (Dow Jones) -- Natural-gas prices have had quite an
unimpressive run in the last six months and the situation may get
worse despite the steep declines in overall drilling and
production.
Futures prices for natural gas have been trading at their lowest
levels since late 2002, most recently below $4 per million
British-thermal-unit level on the New York Mercantile Exchange.
It was a totally different story about a year ago, when cold
weather drove prices to highs around $9.
"High prices last year pushed U.S. exploration to record
levels," said James Williams, an economist at WTRG Economics. "That
increased production capacity."
And the "high capacity, weaker demand due to recession and lower
oil prices caused [natural gas] prices to collapse," he
explained.
Indeed, weak global economies are to blame, but only in
part.
The U.S. Energy Department expects the nation's natural-gas
consumption to decline by 1.3% in 2009, according to the
government's energy outlook report released last month.
"There is plenty of gas available in the U.S. right now, as well
as worldwide," said Charles Perry, president of energy-consulting
firm Perry Management. "Supplies are plentiful and storage is high
so there is little, if any, upside pressure on gas prices now."
The recession's weakening demand and the drilling and
exploration sectors are suffering from budget cuts, but technical
advances in exploration and so-called unconventional resources are
starting to pick up the slack.
Never mind the fact that natural-gas consumption normally climbs
during the summer as cooling demand starts to kick in.
"Natural-gas storage levels are exiting heating season above the
five-year average, while consumption is constrained by negative
growth fundamentals in the broad market and industrial sector," Dan
Payne, an analyst at Paradigm Capital, wrote in a recent note to
clients.
Shale to the rescue
True, logic would lead the market to think that lower demand
would undercut production and it has, but there are other sources
of big supply available thanks to the industry's and U.S.
government's efforts to boost energy output.
"With the price collapse came another in drilling," said
Williams. "Since something close to 25%-30% of U.S. production
comes from wells drilled in the last 12 months, there is a
possibility that depending on weather (hot summer/cold winter) we
will need to import more for the winter of 2009-2010."
The number of rigs running in the U.S. dropped to 1,039 for the
week ended March 27, according to Baker Hughes (BHI). That's down
49% from the 2,031 level seen for the week of Sept. 12, 2008 -- the
highest since 1980, Perry said.
Over time, the market will lessen its reliance on Gulf of Mexico
production, "which has a pretty rapid decline rate anyway, and
producers aren't replacing those reserves due to the price
decline," said Beth Sewell, a managing partner at Quantum Power
& Gas Services.
But there's an "incredible" amount of shale gas coming online
and large supplies of liquefied natural gas will "definitely be an
issue" until global demand picks back up, she said.
"New natural-gas supply during the past two to three years has
been an incredible success story, and almost all of the success can
be attributed to new technology developed to drill and complete the
tight shale formations that do contain natural gas," said
Perry.
Shale is a geologic formation, like a solid rock with
microscopic holes in it, according to Perry. The most developed
shale formation is the Barnett Shale in North Texas and it has
thousands of new wells, he said.
That shale formation has produced 4.8 trillion cubic feet of
natural gas and is expected to produce an additional 40 trillion of
natural-gas resources, according to Chesapeake Energy (CHK), which
pegs itself as the largest U.S. producer of natural gas.
And there are many other shale formations in different stages of
development, said Perry.
"The point of all this is that there now appears to be enough
new undeveloped domestic gas reserves in these shale formations to
supply the U.S. for many years to come," he said.
Terrible timing
Then there's liquefied natural gas, which is expected to
downright flood the market as investment in the global
infrastructure for the fuel over the past several years reaches its
goal.
This year's expected to see massive amounts of LNG from big
overseas producers such as Algeria, Australia, Indonesia, Nigeria,
Oman, Qatar and Russia, as well as Trinidad and Tobago.
Many of the producing countries are emerging third-world
countries "who desperately need the cash so they'll produce and
ship no matter what the price is," Sewell said.
"The U.S. has, by far, the greatest storage capacity for LNG in
the world," said Perry. "So as LNG is shipped, if it has no where
else to go, it will end up going to the U.S. and the shippers will
take almost any price offered because they have to get it unloaded
as soon as possible before it all boils off."
That doesn't bode well for a market that's already bogged down
by hefty natural-gas supplies.
"We are ending the traditional [supply] withdrawal season with a
tremendous inventory," said Sewell. U.S. supplies of the commodity
in storage were running about 29% above the year-ago level, as of
the week ended March 20, according to the Energy Department.
"Until some of that [supply] is worked off, prices will remain
under pressure," said WTRG's Williams.
Futures peaked at $13.58 in early July of last year, but they
will probably range between $3 and $4 through this summer, he
said.
And most analysts predict that, "given the big cushion of
storage gas and still-weak demand, even a major hurricane
disruption is unlikely to cause a huge spike in prices as it has in
the past," said Mark Davidson, editorial director of U.S. Gas News
at Platts. Natural-gas prices spiked to record highs near $16 in
2005, in the aftermath of Atlantic Hurricanes Katrina and Rita.
Overall, the general consensus among industry analysts,
officials and traders is that the days of $15 per million
British-thermal-unit gas, or even $10 gas, are "long gone -- at
least for the foreseeable future," said Davidson.