|
The Natural Gas Market: Demand Exceeds
Supply - Nowhere to Go But Up?
Unconventional
Production Represents Future Sources of
U.S. Gas Supply
By
Ann-Marie Fleming,
www.NaturalGasStocks.com,
www.OilandGasStockNews.com
August 2005
The
Energy Policy Act that was recently signed into action by President Bush in
early August contains provisions directed towards increasing the supply of
natural gas, encouraging new exploration as well as providing tax incentives
towards new construction of pipelines, in hopes of reducing the current
disparity as demand continues to exceed supply.
The
growth in demand for natural gas, explains Philip McPherson, Director of
Research, C.K. Cooper & Company, essentially began with the Clean Air Energy
Act, which restricted the construction of new electrical plants that ran on
oil or coal. Continued pressure on gas prices grew as utilities, industrials
and consumers began switching to natural gas to take advantage of its cost
efficiencies and clean burning attributes. Other factors such as record
price levels for oil, recent heat waves and harsh winters have also
contributed to increased demand for natural gas.
The
problem according to Aubrey McClendon, CEO of Chesapeake Energy Corp, “is
that supply, starting approximately 5 years ago, started to shrink
approximately 2% per year in reaction to 15 years of very low gas prices and
the increasing maturation of the North American gas resource base. Therefore
we have experienced over the past 5 years a growing mismatch between natural
gas demand and supply that has led to a significant increase in gas prices.
In addition, because of the substitutability with oil products in some
applications, natural gas prices often trade in sympathy with oil prices.
As a result of the recent surge in world oil prices, North American natural
gas prices have risen to record levels.”
According to Mr. McPherson, oil will continue to be a determining factor in
the price of natural gas for the next 3 to 5 years. While never expected to
exceed the demand for oil, McPherson sees the high demand for natural gas
continuing to grow. “What
most people overlook is that the majority of the growth is for
transportation. The Global economy in all of its glory has one dire
consequence. While goods can be produced cheaper 5,000 miles away in
China, they still need oil to transport and disperse to every Wal-Mart
across the U.S. With that said, the percentage of our electricity needs that
is fueled by natural gas will continue to increase.”
In
an attempt to increase supply levels, the movement of the natural gas
industry towards the exploration and production from non-conventional gas
sources such as Coal Bed Methane (CBM) and
Liquefied
Natural Gas
(LNG) is gaining momentum.
This act will clearly
cause US based Oil and Gas producers to focus their attentions to the
important task of increasing supplies of natural gas. As Paul Branagan, CEO
of Petrol Oil and Gas explains, “Although the underpinnings of the US
Natural Gas market is based in conventional gas, the growth area is most
certainly unconventional gas like CBM, tight gas and shales. Thus the
industry will have to step up these kinds of production activities
significantly in order to meet the incremental demands that will ultimately
be imposed by the electrical power producers.”
During the past several years Petrol has accumulated a significant CBM
mineral acreage position amounting to approximately 165,000 gross acres in
the developing CBM Cherokee basin of southeastern Kansas. “Although our
current gross production is in the 3,000,000 cubic feet per day range from
our Petrol-Neodesha property, which includes only about 10,000 gross acres,
we are currently negotiating a debt financing package to begin developing a
large portion of our Coal Creek property which includes about 90,00 gross
acres. The Clean Air Act certainly gets our attention and drives home the
need to develop our CBM resources as quickly as possible,” states Branagan.
Unconventional gas resources are gaining more industry and investor
attention as key remaining gas resources. As McClendon explains, “We have
largely depleted our conventional gas plays and so we have to go after
formations that by definition were not economical when gas prices were
lower, but with new technology and higher gas prices they have become
economical and the industry is very aggressive in going after CBM and shale
plays that today make a lot of sense. The problem is that despite the
industry’s success with those plays they have not been able to overcome the
declines that are associated with conventional plays.”
While big resource plays do exist, they are not as prolific and productive
on a per well basis as the conventional plays that are slowly being replaced
describes Joseph Magner, E&P Analyst, Petrie Parkman & Co. "The resulting
impact is that we
have not seen an industry wide supply response that more than offsets the
overall production decline," explains Magner. “You are offsetting typically
higher rate wells in conventional areas with lower rate wells in many of
these unconventional plays. If you look at the rig count which is up
80-100% over the past two years, production has been flat to down in the
U.S.,
so there hasn’t been a supply response even with the increase in rig
activity.”
Experts seem to agree that the future for natural gas supply will be
significantly impacted by
Liquefied
Natural Gas.
Mr. Magner believes that, “LNG
is really the only answer we are going to have long term, but it’s really
not going to effect volumes in a big way until 2008 when some of the
developments that are under construction and development will be up and
running. LNG will be a piece of a puzzle and once 2008 rolls around we are
probably going to need every bit of it that we can get our hands on.”
McPherson
describes LNG as a viable alternative down the road if prices continue to
rise, “If oil hits $100 per barrel that would mean Natural Gas should trade
at $16 + per Mcfe. At that price LNG will be the rage.”
Mr.
McClendon anticipates LNG having a meaningful impact on the market. “This
leads us into a future where
North America
will become integrated into the worldwide gas grid and we’ll do that through
the importation of LNG at prices that we believe will be more or less linked
to world oil prices.”
The
future of the natural gas market appears strong. “While we are extremely
bullish on oil, we have been telling investors to realize that not all E&P
companies are created equal. Meaning, some are 90% oil and others are 90%
gas. Buy it on the dips because the day to day fund manager that doesn't
understand energy stocks, sells on drops in oil, while in our opinion those
are the days you construct your shopping list and buy the one's that are
leveraged to what should be a strong natural gas market for years to come,”
explains Mr. McPherson.
Ann-Marie Fleming
Ann-Marie
Fleming completed her MBA in the United States, where she attended
Webster
University.
She also holds an Honors B.A from the
University
of
Toronto.
She has over fifteen years of experience within the financial industry to
include retail banking and brokerage, investment banking, and mortgage
brokerage within the
United
States
and
Canada,
with a firm background in corporate research.
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp
©Copyright InvestorIdeas 2005
|
