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What’s
up with natural gas prices?
By Allen R. Gibson
Editor, InvestorIdeas.com
Are we running out of gas?
No.
But demand is growing. Domestic supply is
slowly shrinking.
And significant new imports, either from LNG or the far North, are years
away. So what we have, at the moment, is a bit of a supply drop brought on
by Hurricane Ivan, and a lot of nervous investors.
Daniel Yergin, author of “The Prize,”
before the Joint Economic Committee of Congress this week noted the US
has become a "mature" producer that will have to find new
resources to maintain current production levels.
"We are facing a period in which natural
gas risks becoming a seemingly scarce and highly priced fuel," Yergin
said.
Energy futures are now the hottest sector on Wall St. Some are calling energy stocks the new ‘tech bubble’, with all sorts
of speculative players leaping into the market. Oil, for example, is trading
about 70% higher than it was a year ago. This despite the fact that global
supply is still adequate to meet demand. Fund managers are worried, though,
that any significant new disruption of supply – through terror attacks,
war, or more hurricanes – could really throw a monkey wrench into the
global economy.
Another lingering worry among analysts is the
world's limited excess capacity, or supply buffer, which is hovering at only
1 percent above daily global consumption of 82 million barrels. Suddenly,
everyone is trying to hedge their energy bets!
“In our judgement, oil doesn’t belong
where it is,” says energy analyst George Gaspar. “That doesn’t mean
that it can’t go up from here,” he adds, “because the market seems to
want it to go up.”
Gaspar works with Robert W. Baird & Co.
out of Milwaukee, and on the natural gas side of the equation, he sees the
majors moving on to hunt for bigger fish in the mid and far east, leaving
independents to work on finding more domestic supply. Which they are
doing but, he says, “the decline curves are getting more severe, so that
may be one of the critical points influencing prices, But if gas stays above
the $6 level it's going to be very profitable to accelerate drilling
activity,” he notes. “What's happening in gas is going to encourage
increased drilling, particularly in CBM.”
And increased drilling is what we’re seeing, with high rig counts and
expanded exploration activities.
The Supply Side
The push to increase domestic production is in full
swing. But even with accelerated permitting and drilling on the vast
stretches of Federal land under the Bureau of Land Management’s control,
increases in domestic production will not be enough to meet growing demand.
North
America
still has vast untapped gas reservoirs in northern Canada
and Alaska. But bringing that gas to market will rely in part upon the construction of
another major gas pipeline from the Mackenzie Delta. Such a pipeline may
start construction as early as next year, and is expected to deliver 2 to 4
billion cubic feet eventually. But completion is years away.
As are the major increases in Liquefied Natural Gas receiving terminals that
will be needed if LNG is to become a major source of supply. That’s
provided that we build the specialized tankers required to transport the
stuff, and provided the environmentalists don’t keep succeeding at
preventing LNG terminal construction in coastal states.
In the meantime, says Gaspar, “The rig count is going
to have stay pretty heady to ensure enough gas. We think there will
be enough found to get us over the next 3-4 year ‘transition point’ to
get to LNG beginning to add significant supplies.
The LNG boom.
LNG (Liquefied Natural Gas) is a small player in
US
gas supplies currently. We account for only 4% of global demand, according
to the EI
A
, while Asia’s tigers get 68%, and
Europe
accounts for the rest.
But all of that is set to change, as huge new
investments in the technology needed to transport LNG are being made all
over the world, including
China
and the middle east.
A
consortium of most of the oil majors is pumping hundreds of million dollars
into
Qatar
to create huge new LNG facilities.
“If you watch the decisions the majors are making,
like BP ordering a bunch of LNG
tankers recently, we’ll be able to move enormous amounts of the stuff in
6-8 years,” says Gaspar. “The sensitive part of LNG is the competition
from global demand. It looks like that demand is going to be sizeable. But
if gas prices gradually move up on a year to year basis, I think LNG will
become more palatable.”
More palatable, that is, to those concerned about the
potential for an LNG terminal to blow up, either through accident or through
terrorist activity. The resulting explosion would be hard to imagine. So
security and environmental concerns have been holding up LNG facilities
expansion in the US, but that ‘logjam’ may be starting to ease, as both
Texas and Louisiana are pushing for LNG approvals.
Final thoughts:
Natural gas is also in more demand because of the
addition of more than 200,000 megawatts of gas-fired electricity-generating
plants (59 of them in
Texas), which have been built lately. Small wonder that
Texas
is pushing for Federal approval of new LNG ports to be built in the state.
Which is why alternative, harder-to-produce options
like Coal Bed Methane are becoming increasingly relevant. CBM drilling in
Canada
is expected to double next year, according to Calgary-based analysts Peters
and Co., to about 3 thousand wells.
One thing is clear: expect to pay a lot more for your
heating fuel this winter! The EI
A
says oil, gas, and propane will all see steep price increases, while Bob
Best, Chairman of
Atmos
Energy which recently bought
TXU Gas, the utility system that
serves North Texas retail customers, said he expects home heating bills to
rise at least 10 percent to15 percent this winter.
Bad news for consumers. Great news for gas producers.
And so it goes…
Allen R. Gibson
Editor
Allen R. Gibson has over twenty-five years of experience in media and
Corporate communications. He has been a reporter, television producer, and Marketing communications consultant for public companies in both the US
and Canada.
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp
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InvestorIdeas 2004
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