Replies to This Discussion

Permalink Reply by sesport on August 20, 2009 at 16:35

Thanks, I wouldn't reach as far back as '76, though. 2002 looks like it was a rough year. Wellhead prices didn't go back up over $5 and remain until 2004. I guess we'll see if it's going to take almost 2 years for prices to recover this time, too. :0)

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Permalink Reply by Skip Peel - Mineral Consultant on August 21, 2009 at 5:23

The question lies with Finding and Development costs (F&D). Those Plays with low F&D costs will have a sufficient profit margin for continuing development. Those that do not will lie fallow or be minimally produced by companies that have no better option. Read some of CHK's quarterly reports. Aubrey M. makes a point of describing a future where the industry is divided into shale haves and have nots. Haves will have the low F&D costs to remain profitable and grow. Have nots won't. Certainly there is an element of spin in those comments but the central crux of his forecast is correct. The Haynesville Shale Play has low F&D costs that will only improve with time.

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Permalink Reply by Grillin' - MmmMmm on August 21, 2009 at 6:44

First: the wells that are "producing gas now" will certainly NOT "flood the market for a long long time". These wells decline at hyper-rates of decline in the first few months to a year. So, take all of those 10-20 MMCF/day wells and put them at 2 MMCF/day. Now, is the market "flooded"? Plus, all of the other producing basins are declining as well. So if prices stay under $5, as the hedges roll off and as the acreage gets HBP'd at 1 well per section, then expect supply to drift down at a decent rate of decline and to meet up with demand, even if demand doesn't recover.

Just my ever so humble opinion.

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Permalink Reply by Les Bamburg on August 20, 2009 at 17:24

Sesport, how about $1.86/MMBtu in October 2001. See attached graph.

Attachments:

• Henry Hub 8-20-09.pdf, 95 KB

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Permalink Reply by sesport on August 20, 2009 at 17:48

No, no, you can't make me look! It's too hideous! lol

I did see some of those lower prices. I was looking for a most recent extended trend to get a fix on possible duration of this slump.

:0)

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Permalink Reply by Les Bamburg on August 20, 2009 at 18:02

Sesport, we have never been in this exact situation previously. Before 2001 natural gas prices tended to follow crude prices due to the significant level of fuel switching capability. Basically No 6 Fuel Oil set the floor while No. 2 Diesel set the ceiling. That has gone as fuel switching capability has decreased significantly. This is the first time after 2001 that the US gas market has been so oversupplied.

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Permalink Reply by sesport on August 20, 2009 at 18:00

Okay, I peeked between my fingers. It appears those nice, high spikes (and I'm not talking shoes here) occur about every 2-3 years, alternating winters & late summers. My GUESS is to expect the next one in the fall of 2011. But you probably already know this.

This also SEEMS to directly mirror, IMO, the graph of weekly storage that the_Baron posts from EIA. But, hey, I'm not an expert.

thanks :0)

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Permalink Reply by Grillin' - MmmMmm on August 21, 2009 at 1:07

Thanks Les. I posted a link to the average monthly prices but yours are daily prices and much better...errrr worse?? But you know in the 90's, we were all jumping up and down about $2+ gas! So I guess we're spoiled!

I saw a note somewhere yesterday where the folks in North Dakota are flaring roughly the same amount of gas as their usage. Now that's a greenie weenie nightmare! Its associated gas that is produced along with the oil and they have no place to put it so they just flare it.

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Permalink Reply by Les Bamburg on August 21, 2009 at 3:16

Mmmarkkk, actually my graph was monthly prices also. The EIA data is a psuedo-average wellhead price while my graph is Henry Hub monthly cash price which explains the difference between the two.

By the way, I don't pay much attention to daily prices as they do not necessarily reflect the larger market since most gas is transacted on a monthly rather than daily basis.

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Permalink Reply by Grillin' - MmmMmm on August 21, 2009 at 6:49

Could they? Only if we continue with the Obammanation of the free market...if he decides that getting cheap nat gas is a basic right and dictates National Natural Gas Insurance Reform and caps the price below $1.00. That is about the only way I can see of that scenario happening. Okay, a few other equally distasteful and/or unlikely scenarios...global catastrophe that eliminates people but not nat gas wells. A miracle invention that allows generation of power without any raw material and zero capital to build whatever contraption it might be.

Even if demand were cut in half, it is doubtful that prices could go that far down and stay there. Below $1.00, a huge percentage of wells will get shut in...like almost all of them! Then, no new drilling. So, supply dries up and prices go back up.

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Permalink Reply by Grillin' - MmmMmm on August 21, 2009 at 6:51

In the 1970's, demand for natural gas was very very low and the price of coal and fuel oil was also low. There was little pricing power. Will it ever go back there? If it does, there are a lot more things to be worried about!

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