Accurate Analysis of Economics in Naural Gas/Energy Markets?
Don’t bite off more gas than the U.S. can chew
BY JOHN-LAURENT TRONCHE
October 27, 2008
Caught up in the whirlwind of competitive lease offers and the rush to secure drill sites, it appears many Barnett Shale operators stopped short of asking a crucial question: Where is all this natural gas going?
Although dry-gas production grew 8.6 percent from July 2007 to July 2008, natural gas consumption grew just 3.6 percent during the same time period, according to the Energy Information Administration, and some analysts fear future consumption could prove less than rosy should a recession appear likely.
“I think there’s a broad consensus we have too much natural gas, which is why it’s trading at $6, $6.50 and it was twice that a few months ago,” said David Pursell, chairman of the Independent Petroleum Association of America’s Supply and Demand Committee. “Part of the glut we have here, not only do we have supply growth but we’re also entering a time when demand could be contracting. So the glut could be exacerbated by that.”
The production growth spurred in large part by shale development “is pretty phenomenal,” said Phil Budzik, an analyst with the Energy Information Administration, the U.S. Department of Energy agency that acts as statistician to the energy industry.
“Much of that production increase is coming from shale production, so like I say, they’re a victim of their own success,” he said of exploration companies. “The shale beds have turned out to be highly prolific in terms of not only the amount of gas in place, but also the amount of gas that can be produced per well.”
What began in the Barnett Shale has now gone nationwide; the Marcellus, Fayetteville, Woodford and Haynesville shales are just some of the more than 20 areas being explored and developed across North America.
“Just a few months ago, I believe it was in July, prices were up to $13 per million [British thermal units], so it’s not like [natural gas producers] were crazy to do it,” Budzik said. “When prices are high, you try to produce as much as possible.”
But efforts to capitalize on high gas prices outpaced consumption, and furthermore natural gas prices have plummeted by more than 50 percent in the past few months as oil fell, too.
“In any case you can see you’ve got over an 8 percent production growth and a 3 percent growth in consumption, and that’s why prices go down,” Budzik said. “Production grew much faster than consumption – supply and demand, economics 101.”
Heater vs. sweater
Deutsche Bank’s Adam Sieminski, chief energy economist, said he remains bullish on natural gas, but added operators pulling back will help alleviate any fears of a surplus.
“The shale plays have very high depletion rates so we should begin to see some impact on the production numbers over the course of the next six months,” Sieminski said.
A colder winter than usual also could increase consumption as residents heat their homes, but that situation has its flaws, too.
“What appears to be a surplus of natural gas now is relatively temporary, and conditions in the marketplace are likely to be a lot tighter in the future,” Sieminski said. “The only thing that worries me at all is the likelihood that the U.S. is going to have a recession and lower GDP growth is going to mean lower natural gas consumption.”
The R-word also concerns Budzik, who said if one is in store “people will cut back.”
“In the winter, they’ll wear a sweater instead of heat their house,” he said.
So what’s the solution?
“In terms of what companies need to do is mange expenses, hunker down but prepare for better times,” Sieminski said.
Pursell puts it more bluntly.
“Quit drilling,” said Pursell, adding there are about 1,500 drilling rigs in the Lower 48. “Seriously, quit drilling. That’s what they need to do.”
Loud and clear
Some companies already got the
message.
In late September, Chesapeake Energy Corp. said it would cut its drilling budget by $3.2 billion, or 17 percent, over the next two years amid “concerns about the possibility of an emerging U.S. natural gas surplus,” according to a statement.
The Oklahoma City-based company, along with XTO Energy Inc. and Vantage Energy LLC, also has stepped back from high-dollar leases – between $25,000 and $30,000 an acre – it signed with North Texas residents and neighborhood groups.
“What [exploration companies] are faced with now is a glut of leases,” Budzik said. “The lease cost is an upfront cost, and everybody – including ourselves – looks at these rates of returns from net cash flows, after-tax cash flows. It’s the upfront costs that kill you.”
Despite current problems facing the industry, Pursell shares Sieminski’s view that the future could prove brighter than the present
“I think over the next five years, I absolutely expect the U.S. economy to expand,” he said. “If the U.S. economy expands, natural gas will grow the electric power sector.”
BY JOHN-LAURENT TRONCHE
October 27, 2008
Caught up in the whirlwind of competitive lease offers and the rush to secure drill sites, it appears many Barnett Shale operators stopped short of asking a crucial question: Where is all this natural gas going?
Although dry-gas production grew 8.6 percent from July 2007 to July 2008, natural gas consumption grew just 3.6 percent during the same time period, according to the Energy Information Administration, and some analysts fear future consumption could prove less than rosy should a recession appear likely.
“I think there’s a broad consensus we have too much natural gas, which is why it’s trading at $6, $6.50 and it was twice that a few months ago,” said David Pursell, chairman of the Independent Petroleum Association of America’s Supply and Demand Committee. “Part of the glut we have here, not only do we have supply growth but we’re also entering a time when demand could be contracting. So the glut could be exacerbated by that.”
The production growth spurred in large part by shale development “is pretty phenomenal,” said Phil Budzik, an analyst with the Energy Information Administration, the U.S. Department of Energy agency that acts as statistician to the energy industry.
“Much of that production increase is coming from shale production, so like I say, they’re a victim of their own success,” he said of exploration companies. “The shale beds have turned out to be highly prolific in terms of not only the amount of gas in place, but also the amount of gas that can be produced per well.”
What began in the Barnett Shale has now gone nationwide; the Marcellus, Fayetteville, Woodford and Haynesville shales are just some of the more than 20 areas being explored and developed across North America.
“Just a few months ago, I believe it was in July, prices were up to $13 per million [British thermal units], so it’s not like [natural gas producers] were crazy to do it,” Budzik said. “When prices are high, you try to produce as much as possible.”
But efforts to capitalize on high gas prices outpaced consumption, and furthermore natural gas prices have plummeted by more than 50 percent in the past few months as oil fell, too.
“In any case you can see you’ve got over an 8 percent production growth and a 3 percent growth in consumption, and that’s why prices go down,” Budzik said. “Production grew much faster than consumption – supply and demand, economics 101.”
Heater vs. sweater
Deutsche Bank’s Adam Sieminski, chief energy economist, said he remains bullish on natural gas, but added operators pulling back will help alleviate any fears of a surplus.
“The shale plays have very high depletion rates so we should begin to see some impact on the production numbers over the course of the next six months,” Sieminski said.
A colder winter than usual also could increase consumption as residents heat their homes, but that situation has its flaws, too.
“What appears to be a surplus of natural gas now is relatively temporary, and conditions in the marketplace are likely to be a lot tighter in the future,” Sieminski said. “The only thing that worries me at all is the likelihood that the U.S. is going to have a recession and lower GDP growth is going to mean lower natural gas consumption.”
The R-word also concerns Budzik, who said if one is in store “people will cut back.”
“In the winter, they’ll wear a sweater instead of heat their house,” he said.
So what’s the solution?
“In terms of what companies need to do is mange expenses, hunker down but prepare for better times,” Sieminski said.
Pursell puts it more bluntly.
“Quit drilling,” said Pursell, adding there are about 1,500 drilling rigs in the Lower 48. “Seriously, quit drilling. That’s what they need to do.”
Loud and clear
Some companies already got the
message.
In late September, Chesapeake Energy Corp. said it would cut its drilling budget by $3.2 billion, or 17 percent, over the next two years amid “concerns about the possibility of an emerging U.S. natural gas surplus,” according to a statement.
The Oklahoma City-based company, along with XTO Energy Inc. and Vantage Energy LLC, also has stepped back from high-dollar leases – between $25,000 and $30,000 an acre – it signed with North Texas residents and neighborhood groups.
“What [exploration companies] are faced with now is a glut of leases,” Budzik said. “The lease cost is an upfront cost, and everybody – including ourselves – looks at these rates of returns from net cash flows, after-tax cash flows. It’s the upfront costs that kill you.”
Despite current problems facing the industry, Pursell shares Sieminski’s view that the future could prove brighter than the present
“I think over the next five years, I absolutely expect the U.S. economy to expand,” he said. “If the U.S. economy expands, natural gas will grow the electric power sector.”
Views: 57
Replies to This Discussion
-
Permalink Reply by Cottontop on
-
Skip,
You always seem to be the bearer of bad news. Just kidding - just seems like that there is all there is lately. Don't want to hear that - Do not drill - does not make me smile.
-
Permalink Reply by Skip Peel - Mineral Consultant on
-
Yeah, it brought me up short when I read it. But as I thought about the "glut" principle, it made some sense. With ng headed to $6 this morning, I fear that depressed price will reinforce the "Do not drill" argument. I will take no offense with any who consider me a "bearer of bad news". My motivation is to inject some small degree of pragmatism into the discussions on the site. I would never wish anything other than the best for all our members.
-
Permalink Reply by P.G. on -
Looks like we all need to get behind T-Boone's plan to have NG used for transportation. I haven't heard much in the way of that happening from either candidates. The markets for NG now are pretty much saturated. Don't look for much improvement, considering the OGs can flood the markets any time they choose, until new uses are developed.
-
Permalink Reply by Louzanne on
-
My sentiments as well. T. Boone was on 60 Minutes last night and came across very well in my opinion. He repeated as much as he could concerning his plan.....as stated here in Shreveport last week. The future does look good for n/g if (big if) T. Boone's plan is taken seriously by the new administration.
-
Permalink Reply by Skip Peel - Mineral Consultant on
-
Louzanne, would you consider buying a CNG vehicle or converting your present ride (if Possible) to CNG if you could fill it up at home? I have heard $0.50/gallon. But I just passed by several gas stations charging $2.40/gallon. This recession is a stumbling block to many potentially valuable plans and I am afraid it may derail T. Boone's also. Who would have thought regular unleaded would be $2.40 five weeks ago?
-
Permalink Reply by Louzanne on
-
Skip:
Yes indeed I would. He says CNG is roughly half the cost of gasoline. However, I think what T. Boone would say to this is that the price here & now is not the consideration....its the simple fact that we must reduce our dependence on foreign oil. CNG can bridge the gap between now and when other sources of energy are developed. He is really advocating using the USA's resources and says natural gas is the obvious choice of which we have an abundance.
-
Permalink Reply by Skip Peel - Mineral Consultant on
-
Yes, Louzanne, I agree that T. Boone would say that the price of gasoline is not the most important consideration. And he would be right. I'm just not sure a lot of drivers in this part of the world would agree with him. And many of those who would agree wouldn't go out and buy or retrofit their vehicle to run on CNG. I would like to see a CNG demonstration project here. Get Cedric and Lo to agree to retrofit some city vehicles, get Honda to offer rebates on Civic GX's and make home filling systems available. Shreveport-Bossier is the perfect place. The effort will need federal, state and local support financially and commitments from CentrePoint Energy. A challenging political job for sure. I think someone should make an effort. Care to take it on?
-
Permalink Reply by Louzanne on
-
K.B
I believe so. At least that and maybe more. Within the next 10 years at the present rate of use and cost we will be in deep do d-.
Jim
T. Boone said the same thing.....natural gas available now for transportation fuel. He noted a small community in California that now uses CNG for all of their municipal trash vehicles and maybe other municipal vehicles....not quite sure.
Skip
At the very least the city and parish administrations should seriously look into this option.
And hey! You very well aware I am quite tired of politically charged endeavors ...except for a few local exceptions :) besides G & I are retired from all of that! Now you, however.......
-
Permalink Reply by Bobi Carr ("parker") on
-
Jim71009 has blogged that the facility that is being build for the supposed "cyber command", would be a great place to start this initiative. It would be one way for Bossier politicians to not end up with egg on their face.
-
Permalink Reply by RAY on
-
Not only does Pickens have "personal" motives, so do we.
I wonder what percentage of his supporters are living on one of the many Shales..
would we be so interested if we were not sitting on 4th largest etc.....???? BTW I'm signing up.
-
Permalink Reply by Spring Branch,mineral owner on
-
I have to admit that owning minerals in NW louisiana does alter my view of CNG but I'm also practical. If most folks thought there could be real $$$ savings by using CNG vs gasoline and at the same time do something favorable for our national interests.....what's not to like about that. What it is going to take is for some influential politicians to become leaders and lead. What a novel thought. Boone is doing his share , someone in government at the local, state, and national levels have to pick up the mantle.
-
Permalink Reply by Atlpilot on
-
Yes, we have a temporary reduction in the price of oil and NG. This will not last. As the world economy- and more important the US economy- recovers, the price of oil and NG will increase. I'm just guessing here, but I think NG in the range of $7-12 over the next 5 years is reasonable. Oil will probably exceed $100/bbl as soon as the world economy starts to recover.
I think the recent halt to leasing activity has more to do with credit freeze from lending institutions, and general economic uncertainty, than from long term price of NG. The O&G's make their long term plans based on the projected price of NG and oil, not on temporary variations in price. That is why they try to hedge as much as possible to give themselves a known price to work with in the future. I will admit the sudden drop of 50% in NG did take some of the wind out of their sails.
I am encouraged that some of the companies that are cutting drilling/production in other areas are actually increasing their drilling in the Haynesville, as witnessed by Chesapeake moving their rigs from the Bartnett to the HS. I believe this indicates the value of the HS for a number of reasons-initial high production of some of the wells, pipeline infrastructure, etc.
The author mentions the increased use of NG to grow the electric power sector. I think you will also see an increased use of NG in transportation. My local community in Georgia is part of 30 other small cities in GA that are planning to convert all of their municipal vehicles to NG, regardless of the current price of oil and regular gas, as they fully expect the price of oil to increase in the future. They will also make their refueling stations available to the general public for NG vehicles. I would guess that this is going on in other areas around the country.
Again, this are just my thoughts. I am not an expert, and am not part of the O&G industry, but I remain long term positive on NG and the HS.
Support GoHaynesvilleShale.com
Top Content
Blog Posts
The Lithium Connection to Shale Drilling
Shale drilling and lithium extraction are seemingly distinct activities, but there is a growing connection between the two as the world moves towards cleaner energy solutions. While shale drilling primarily targets…
ContinuePosted by Keith Mauck (Site Publisher) on November 20, 2024 at 12:40
Not a member? Get our email.
Groups
-
San Augustine, TX
386 members
-
Miller County, Arkansas
27 members
-
Sabine Parish, LA
455 members
-
South Caddo Parish Group
440 members
-
Natchitoches Parish
400 members
-
Bienville Parish, LA
244 members
-
Fayetteville Shale
149 members
-
North Caddo Parish
358 members
-
Central Texas Gas
63 members
-
Cass County, TX
119 members
© 2024 Created by Keith Mauck (Site Publisher).
Powered by
