Natural gas producers reduce output in attempt to correct market (6/15/09)
Natural gas producers seek balance
By KRISTEN HAYS Copyright 2009 Houston Chronicle
June 13, 2009, 3:08AM
Natural gas producers have been idling rigs for six months, trying to reduce output and boost prices that fell sharply amid bloated inventories and recession-shrunken demand.
That sweet spot remains elusive, despite a 56 percent reduction in the number of rigs drilling for natural gas, to 700 from the September peak of more than 1,600.
“It’s a self-correcting mechanism,” said David Pursell, an analyst with Tudor, Pickering, Holt & Co. Securities in Houston. “Prices go low, the rig count follows, and voila, production falls and the market fixes itself.”
But natural gas prices have largely lingered below $4 per million British thermal units since March after falling 78 percent from a high of more than $13 last summer.
Pursell said this down cycle has been more severe than is typical because the recession-fueled fall in demand followed rapid supply growth last year thanks to a boom in producing gas from thick shale rock. And inventories keep rising as producers have yet to dial down production enough to decrease underground stockpiles. Natural gas in storage reached 2.443 trillion cubic feet for the week ending June 5, the U.S. Energy Information Administration reported Thursday, up from 2.337 trillion a week earlier and 1.875 trillion in early June last year.
The agency, an arm of the Department of Energy, also projected in its monthly short-term outlook that total natural gas consumption is projected to fall by 2.2 percent this year and then increase slightly in 2010.
Headed for a record
By October, the EIA expects gas in storage to reach 3.659 trillion cubic feet — 94 billion cubic feet above the previous record of 3.565 trillion cubic feet in October 2007. The nation’s total storage capacity is about 3.8 trillion cubic feet.
“We’re producing a ton of gas. It’s dropped off some, but we’re producing from wells already drilled,” said James Williams, head of WTRG Economics, an Arkansas-based energy consulting firm.
“Clearly, we have more supply than demand,” Williams said.
Likely won’t follow oil
The Energy Information Administration doesn’t expect natural gas prices to mimic crude’s recent uptick. Instead, the agency projects that natural gas prices will average $4.13 per million Btu this year and creep up to an average of $5.49 in 2010.Natural gas for July delivery closed at $3.86 per million Btu Friday on the New York Mercantile Exchange.
“There certainly has been no indication on the price side that the market thinks we’re digging out of that supply situation,” said Karr Ingham, head of Ingham Economic Reporting in Amarillo. “We’re relatively early into this contractionary period.”
Pursell said the shrunken rig count will result in less production, but not as quickly as the industry would like. Weak demand will linger as long as industrial usage falls, as it will when GM shutters factories for nine weeks this summer. Car manufacturing requires lots of natural gas to produce steel, rubber and plastic, he noted.
The Energy Information Administration expects industrial consumption to fall by 8 percent this year.
New factors
And the storage side of the issue has some new factors that didn’t exist in previous times of oversupply, Pursell said.
First, increased liquefied natural gas imports could add more to storage and keep prices low. LNG is natural gas chilled to liquid form so it can be shipped via tanker or truck when pipelines aren’t available.
More LNG has been expected to arrive in the U.S. this year because of weak demand elsewhere and increased capacity to liquefy natural gas at plants in other parts of the world, including Qatar, Algeria and Russia.
“There’s lots of LNG out there and uncertain global demand,” Pursell said.
Second, technological advances in shale gas production have created more prolific wells. A tried-and-true vertical well is drilled straight down. Now producers also drill horizontal wells, where the bit dives vertically and then turns to drill sideways through a formation, gaining access to more gas than a vertical well. More access means more production per well.
Best wells drilled first
And while the overall natural gas rig count has plummeted, producers are ditching more rigs that drill vertically than ones drilling horizontally. Pursell said the horizontal rig count is down 40 percent, while the vertical rig count is down 64 percent.
“When times are tough, cash matters, and you’re trying to survive, you tend to keep drilling your best wells and you tend to try not to drill your worst wells. In simple terms, you drill your best stuff first,” he said.
Ingham said the pullback in drilling lays the foundation for prices to spike when demand recovers with the economy, storage thins out and production is slow to restart.
“We go through these very defined cycles and over the course of the contraction, we sideline so much production capacity that we generally get caught a little flat-footed. There’s an ugly intersection between strengthening demand and falling supply,” he said.
kristen.hays@chron.com
By KRISTEN HAYS Copyright 2009 Houston Chronicle
June 13, 2009, 3:08AM
Natural gas producers have been idling rigs for six months, trying to reduce output and boost prices that fell sharply amid bloated inventories and recession-shrunken demand.
That sweet spot remains elusive, despite a 56 percent reduction in the number of rigs drilling for natural gas, to 700 from the September peak of more than 1,600.
“It’s a self-correcting mechanism,” said David Pursell, an analyst with Tudor, Pickering, Holt & Co. Securities in Houston. “Prices go low, the rig count follows, and voila, production falls and the market fixes itself.”
But natural gas prices have largely lingered below $4 per million British thermal units since March after falling 78 percent from a high of more than $13 last summer.
Pursell said this down cycle has been more severe than is typical because the recession-fueled fall in demand followed rapid supply growth last year thanks to a boom in producing gas from thick shale rock. And inventories keep rising as producers have yet to dial down production enough to decrease underground stockpiles. Natural gas in storage reached 2.443 trillion cubic feet for the week ending June 5, the U.S. Energy Information Administration reported Thursday, up from 2.337 trillion a week earlier and 1.875 trillion in early June last year.
The agency, an arm of the Department of Energy, also projected in its monthly short-term outlook that total natural gas consumption is projected to fall by 2.2 percent this year and then increase slightly in 2010.
Headed for a record
By October, the EIA expects gas in storage to reach 3.659 trillion cubic feet — 94 billion cubic feet above the previous record of 3.565 trillion cubic feet in October 2007. The nation’s total storage capacity is about 3.8 trillion cubic feet.
“We’re producing a ton of gas. It’s dropped off some, but we’re producing from wells already drilled,” said James Williams, head of WTRG Economics, an Arkansas-based energy consulting firm.
“Clearly, we have more supply than demand,” Williams said.
Likely won’t follow oil
The Energy Information Administration doesn’t expect natural gas prices to mimic crude’s recent uptick. Instead, the agency projects that natural gas prices will average $4.13 per million Btu this year and creep up to an average of $5.49 in 2010.Natural gas for July delivery closed at $3.86 per million Btu Friday on the New York Mercantile Exchange.
“There certainly has been no indication on the price side that the market thinks we’re digging out of that supply situation,” said Karr Ingham, head of Ingham Economic Reporting in Amarillo. “We’re relatively early into this contractionary period.”
Pursell said the shrunken rig count will result in less production, but not as quickly as the industry would like. Weak demand will linger as long as industrial usage falls, as it will when GM shutters factories for nine weeks this summer. Car manufacturing requires lots of natural gas to produce steel, rubber and plastic, he noted.
The Energy Information Administration expects industrial consumption to fall by 8 percent this year.
New factors
And the storage side of the issue has some new factors that didn’t exist in previous times of oversupply, Pursell said.
First, increased liquefied natural gas imports could add more to storage and keep prices low. LNG is natural gas chilled to liquid form so it can be shipped via tanker or truck when pipelines aren’t available.
More LNG has been expected to arrive in the U.S. this year because of weak demand elsewhere and increased capacity to liquefy natural gas at plants in other parts of the world, including Qatar, Algeria and Russia.
“There’s lots of LNG out there and uncertain global demand,” Pursell said.
Second, technological advances in shale gas production have created more prolific wells. A tried-and-true vertical well is drilled straight down. Now producers also drill horizontal wells, where the bit dives vertically and then turns to drill sideways through a formation, gaining access to more gas than a vertical well. More access means more production per well.
Best wells drilled first
And while the overall natural gas rig count has plummeted, producers are ditching more rigs that drill vertically than ones drilling horizontally. Pursell said the horizontal rig count is down 40 percent, while the vertical rig count is down 64 percent.
“When times are tough, cash matters, and you’re trying to survive, you tend to keep drilling your best wells and you tend to try not to drill your worst wells. In simple terms, you drill your best stuff first,” he said.
Ingham said the pullback in drilling lays the foundation for prices to spike when demand recovers with the economy, storage thins out and production is slow to restart.
“We go through these very defined cycles and over the course of the contraction, we sideline so much production capacity that we generally get caught a little flat-footed. There’s an ugly intersection between strengthening demand and falling supply,” he said.
kristen.hays@chron.com
Views: 24
Replies to This Discussion
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Permalink Reply by VSC DeSoto South on -
Wouldn't it be nice if the U.S. government would have the foresight to tell the LNG importers there is a maximum amount of NG they can export here, now? Not wait until it slaps us in the face that we have so much NG imported that it'd be cheaper to use that than to use that which is under our feet and employs our people. If it's homegrown we can control the supply and the cost.
I am concerned that if it all gets dumped here, there will be no demand to drill here, not for a very very, very lonmg time.
Why do we not protect our interests until they have us in the corner, are there no foward thinkers?
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Permalink Reply by sesport on
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VSC - remember, the 2 sectors using ng most are energy & industry. I'm keeping my fingers crossed that the nuclear power plants projected for the SE won't all be built (too costly, environmental issues) and some of them will instead be built as ng powered plants.
And I'll probably get hit over the head by someone for saying that. Oh well, I was reconsidering buying a motorcycle for transportation, so I went out and bought a helmet to start practicing. :0)
Don't forget also, there are only so many LNG terminals, and they employ folks, too.
best - sesport :0)
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Permalink Reply by Grillin' - MmmMmm on
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Our government won't restrict the number of illegal aliens coming into our country but we want them to limit the amount of LNG? How long before we have illegal LNG? Will they get a group name and start protesting everytime we want to...egads!!...enforce the law?? How insensitive!
Our government for years has tried to contol the price and volume of food/farm products and many other things. In the end, it bites us in the but. We pay farmers to NOT grow things. Will we pay LNG facilities to NOT import LNG?
Oh well, at least we'll have our gov't healthcare and our gov't cheese! And our gov't cars. And our gov't banks. And our gov't schools. And our gov't housing. And our gov't mortgages. Man, those smart fellows and ladies in D.C. are going to be busy! In the meantime, other smart people are busy finding ways to get their money out of here protected from the thundering herd!
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Permalink Reply by sesport on
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Bad day at the "market" yesterday? lol BTW, you paying that maid yet your proportionate share of that 6 figure salary I pointed out to you?
Mmmarkkk, I realized long ago that you're a "glass half empty" kinda person. What you haven't realized is that the air in the top half of that glass is just as important as the water filling the bottom half.
Think about it ... and have a better day today. best - :0)
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Permalink Reply by Grillin' - MmmMmm on
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I like that air thing!
Market yesterday was actually pretty good...UNG made a nice run up...dividend stocks still paying dividends...
I missed that proportionate share thing or it went with some of that short term memory I lost over the last 6-pack of Negro Modella. I'll go back and find it. But I'm still paying my maid what she's asking...until my taxes go up.
Don't want the gov't setting an artificial floor under nat gas prices, even if that ends up costing me money. Sorry. Just want the market to be the market. I love volatility...its what makes investing fun and profitable!!
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Permalink Reply by sesport on
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Mmmarkkk - Go look for the Mothers' Day topic (that's where I posted a link to the article).
Now, you sound like your day is starting to go better. If the market volatility disappoints you, go fire up the barbeque. :0)
Rereading my post, I may have sounded a little snippy, my apologies. I find you usually have a good take on things.
best again
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Permalink Reply by Grillin' - MmmMmm on
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No prob's sesport. I generally don't take personally anything said on this board as I have a fairly thick skin and like to think I have a good sense of humor!
I'll look for the Mom's day topic. barbeque volatility makes me even happier than stock market volatility. Especially if you use gasoline for starter fluid!!
Joke for today: Name one thing that God and Obama do NOT have in common: God doesn't think HE's Obama! On second thought, not so much of a joke!!!
Have a great day! Time for some lunch! Then a nap and then off to the rig!
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Permalink Reply by The_Baron on
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I tend to agree with Mark,
The concept of Captilism is to obtain goods and services at the cheapest possible price. Limits on lng imports could only hurt american consumers. Besides, after the feds screw the domestic industry by taking away our needed tax incentives, we will need all the cheap imports we can get.
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Permalink Reply by sesport on
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Baron - Sorry, the "oh woe is me" line is wearing a little thin. Re. capitalism & cheapest possible prices, of course that's the idea. So, I would hazard a guess (although not an expert) that a lot of our (until most recently) more costly product of ng is now doing a cost "reset."
Most Americans have been feeding the foreign production for years because it is cheaper. (Please see my reference above to Mmmarkkk's previous disclosure about his maid.) Then bemoan "oh woe is me" when US production falls off, people lose jobs, money flows to foreign countries.
IMMVHO, balance is the key. As I said, the air in the proverbial glass is just as important as the water.
Respectfully - sesport :0)
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