Summary

Natural gas prices are the lowest in seven years. Current price is below $3/million btu. Decline resulted from latest inventory report. Rigs drilling for natural gas are down by one half in the U.S. and by two-thirds in Canada. Companies that are still drilling, connect wells to pipelines but leave the valve closed. Others, like leader EnCana, are shutting in wells until prices improve. Analysts say more supply must be removed from the market. If not prices could plunge to $1/million btu

Analysis

The overall worldwide natural gas supply (including LNG) has been thoroughly studied by a number of experts. Three problems exist today which, taken together, suggest that little or no improvement in prices is likely either this year or next. First of all is the international financial crisis. While it appears to be lessening, industrial activity is far from levels of one year ago. Depending upon how long it takes for confidence to return, it is impossible to predict future levels of commercial and industrial activity. Shale gas drillers in the U.S. continued to develop more and more supply even in the face of a recession. Today the surplus defies the imagination and there is no reason to think that will change. Drillers had hoped that by now, high shale gas well decline rates would have brought the system back to equilibrium. That has not happened because new completion methods adopted in the last year have prolonged high initial production rates. In time, the declines will resume but they have been pushed ahead for several months if not years. The third problem is that major oil companies have brought large new supplies of liquefied natural gas (LNG) to market even as shale gas was taxing the system. Much of the LNG is free, paid for by the value of extracted natural gas liquids. Transportation costs are falling because of the introduction of huge new LNG carriers. The ExxonMobil Qmax carriers dwarf existing LNG tankers which are now in surplus and are being laid up. Still, there is no doubt that low natural gas prices will spur the inevitable and ongoing switchover from crude oil to natural gas. Not only do low prices encourage demand but the environmental friendliness of natural gas continues to be a major factor. So the question is this. When will increased demand intersect the natural gas supply curve? My best guess is that the earliest will be 2011. That is based on my recent forecast of crude oil avails over the next five years (based on the Oil & Gas Journal new and ongoing projects report published in the August 10 issue and written by Production Editor Guntis Moritis). Two important factors govern supply. By far the main factor is the decline rate for existing oil fields. The international Energy Agency recently revealed results of a study of 800 mature oil fields which pointed to a 6.7% annual decline rate. The second factor is that while the international majors are maintaining investment schedules, national oil companies and independents are not. Combined, these factors will hasten the day of supply/demand balance. In the world of oil, we had a super boom for several years. Now we have a super bust. That is the way it is.