|
|
|
|
|
US natural gas futures fell to their lowest level for six and a half years this week and the outlook isn't bullish
With Nymex's June contract trading below $3.50/m Btu, the front-month contract has lost more than three quarters of its value since July 2008, when the price almost reached $14/m Btu.
But the US natural gas industry is used to rapid change: half a decade ago, energy firms were fretting about how they were going to import enough gas to meet the country's rapidly rising needs. The assumption was that domestic production was in inexorable decline and that unconventional resources would be too costly to make a significant difference; suppliers set about building regasification terminals so that they would be able to import enough liquefied natural gas (LNG) to avoid shortages and price spikes.
That picture is a distant memory. Spectacular exploration success in the country's extensive shale-gas deposit has transformed long-term assumptions about the US' gas-import requirements (PE 4/09 p16).
The Gas Technology Institute, a not-for-profit US research and development organisation for the gas industry, has estimated the country's shale-gas potential at up to 780 trillion cubic feet (cf). A report by Navigant Consulting on behalf of the American Clean Skies Foundation (ACSF) has suggested recoverable supplies in the US may amount to 2,247 trillion cf (PE 4/09 p15).
Production potential is promising as well. The US Natural Gas Supply Association, which estimates that gas from shale plays supplied 10-12% of US gas demand in 2008, says the contribution of the resource to national supply could double in the next 10 years, meeting a quarter of the country's demand. Ziff Energy Group, a consultancy in Canada, estimates that gas production in North America from shale, coal seams and tight sandstones will reach 46bn cf/d by 2020 – more than twice the 2000 total – accounting for over half of the region's gas consumption.
But, for the short term, softening demand and prices resulting from the recession have changed assumptions about when that gas will be exploited. The pace of drilling has slumped: between 2000 and 2007, 4,200 horizontal wells were drilled in the US' most productive shale-gas basin, the Barnett shale, near Dallas, Texas. However, according to Baker Hughes, the number of rigs drilling for natural gas in the US has more than halved from a September peak of 1,606.
In the long term, of course, the shales remain a source of gas of great strategic value to the US: when prices reach a certain level – probably somewhere not far above $5/m Btu – drilling will pick up again, capping the US market's need for gas imports. Some shale-gas prospects may even be profitable below $5/m Btu.
But gas prices are unlikely to move back above $5/m Btu for a while. Storage levels are high: 35% above year-ago levels and 23% above the five-year average, according to the Department of Energy. And, although the number of drilling rigs has fallen dramatically, the extent of the decline in upstream activity is yet to filter through proportionately to production: companies are tending to keep rigs going in the most productive parts of fields. Demand, meanwhile, has weakened because of the economic downturn.
One effect of the slow-down in domestic drilling is that gas imports could increase, says the Energy Information Administration (EIA). It thinks LNG imports will probably rise to about 480bn cf in 2009, from 352bn cf in 2008, as the slump in global economic activity coincides with the start-up of new liquefaction capacity in the Qatar, Peru, Yemen, Australia and Indonesia. "Depressed LNG demand in Asia and Europe should tend to increase the amount of LNG available to the US," the EIA said in its latest short-term energy forecast. There is certainly no shortage of LNG-import capacity. According to Petroleum Economist's LNG Data Centre there is around 70m t/y of LNG-import capacity and as much again due for completion by 2011. But 480bn cf is the equivalent of just over 9m t/y.
LNG exporters' need to rely on the US, given the low level of prices there, is a reflection of the weakness of the global LNG market at present. Yet Qatar's LNG projects will still be profitable at $3.50/m Btu. And the value of the US from the point of view of exporters is that it remains a guarantor of demand at a time when demand globally is weak; sellers might not much like the price, but they do like the depth of demand and flexibility of the US market.
Low gas prices in the US also means low equity prices. Shares in Chesapeake Energy, a US shale-gas specialist, are trading at around $20, compared with a 52-week high of $74. Similarly, some Barnett shale acreage that was achieving prices of $25,000 a year ago, can now be bought for as little as $3,000.
For a company with the luxury of taking a long-term view of energy prices, now is a logical time to buy. It's no surprise that rumours of a full take-over by BP of Chesapeake have resurfaced. BP has already established a foothold in the US shale-gas plays, having bought acreage in the Fayetteville and Woodford shales from Chesapeake last year for a total of $3.65bn. But Chesapeake has more to offer: 8.6 trillion cf equivalent (cfe) of total proved reserves and 53 trillion cfe of unproved reserves, it says. It may be time for some corporate consolidation.
