Monday, June 25, 2012

Clashing Viewpoints: Natural Gas Glut vs. Natural Gas Shock! You Be the Judge

For the past few years, a deluge of unconventional natural gas has been driving prices down across North America. But there is a good deal of disagreement between mainstream energy analysts and analysts of the, shall we say, doomer persuasion, as to whether we are seeing a true and lasting glut of natural gas supplies -- or whether we are seeing a mere "flash in the pan" of fools' gas.

Here is mainstream point of view, pointing out the multiple factors which are leading to a sustained natural gas glut -- at least in North America:
Natural gas producers are cutting production in hopes of bringing down supplies and therefore increasing prices. The industrywide gas rig count fell by 23 last week, to 624, the lowest in 10 years, according to driller Baker Hughes (BHI). Yet production keeps growing. It is projected to average 69.2 billion cubic feet per day in 2012, up from an average 66.2 billion cubic feet per day last year, according to the Energy Information Administration. And supplies keep growing. The EIA predicts natural gas in storage will reach a record 4.1 trillion cubic feet by October, compared with 2.5 trillion cubic feet now.

One reason: Oil drillers produce gas as a byproduct, and with oil prices high, oil drilling is in gear. “It’s very attractive to drill for oil, so that will continue,” says Grubert. “Associated gas from oil wells will offset reduced drilling specifically for natural gas.” The warm winter, which reduced demand for natural gas used for heating, also helped keep supplies high. Gas pumped as a byproduct of oil and other liquids will represent 75 percent of the increase in natural gas production this year and as much as 90 percent next year, according to Barclays (BCS) research. Such byproducted output, as it is called, will probably keep rising as long as oil remains above $75 a barrel, the bank says.

The gas glut comes as the industry is banking on the future of hydraulic fracturing, or fracking. The American Natural Gas Alliance reckons that the boom in the exploitation of shale natural gas could represent 60 percent of U.S. natural gas production by 2035, compared with 27 percent in 2010. _BW

The author is explaining why production of natural gas in North America continues to spike ever higher, at the same time that prices are at record lows. He explains that even as many unconventional gas producers are cutting back on production, overall gas production continues to rise. And he tells us why.

Doomer analysts, on the other hand, see the cutback in unconventional gas production as a sign that the wells are being quickly depleted. Doomers have long predicted that the unconventional oil & gas bonanza would not last more than a few years, and they can hardly wait to pop the corks on their champagne bottles:
Money has been thrown at the industry, but the notion is dawning that the game is up and that returns will never materialize. The ponzi scheme has reached its natural limit, and investors are waking up to the realization that they have been chasing a fantasy. Ironically, just as the washout begins, natural gas prices may have bottomed.

Conventional natural gas in North America peaked in 2001. Coal bed methane and now shale gas have been revealed to be massively overblown as an energy source. Producers are reaping the consequences of malinvestment and will be going out of business. Demand has been building with the transition from coal to natural gas for power generation. This is an ideal set up for a supply collapse and subsequent price spike.

North America is poised for a huge natural gas shock. Far from being an exporter, North America is going to experience a natural gas supply crunch. Prices will be rising at the same time as peoples purchasing power falls precipitously, thanks to deflation. The structural dependency on natural gas that has been cemented in recent years is going to guarantee maximum pain as prices reconnect with reality. _BI

Those who are interested in contrasting the two viewpoints, should visit both websites linked above, and follow the links.

Economic cycles help to dictate which forms of energy will be economical to produce at any given time. Political regulations will likewise affect which resources can be tapped and which must be left in the ground.

North America has been the beneficiary of massive energy deposits, which were made available for production by improved technologies, private property laws, and a private sector that has not yet been destroyed by a bloated central government.

Prices of natural gas are higher in other parts of the world which have not had such advantages. But such high natural gas prices are unlikely to remain so high as they are, once the North American production technologies (and North American gas) begin to sweep around the world.

Meanwhile, in North America, multiple new uses for natural gas are springing up, which will eventually reverse the abrupt downward trend in prices. Natural gas prices will gain support from several technologies of substitution for crude oil -- including GTL (gas to liquids), ethylene cracking, propane dehydrogenation, LNG production, CNG use for multiple internal combustion engine applications, etc. etc.

You might say that this game is still in the opening stage.

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Blogger Hell_Is_Like_Newark said...

From the data I looked at, shale gas wells do have a steeper decline curve than conventional wells. Though this seems to be less the case as the hydraulic fracturing process improves.

I have concerns for a crash in prices causing what we faced in the mid to late 90's when oil prices collapsed. Domestic production cratered. When the world economy finally recovered after the Asian 1997 meltdown, production couldn't meet the new demand.

Wells don't go back into service overnight. It takes time to get the rigs and equipment back into place. Also, states like ND require that the well riser be completely filled with concrete and not merely capped. This means you have to completely re-drill the well once prices increase.

IMO, what will drive natural gas prices will be Say's Law: Production creates its own demand. How much production will depend on the economic policies practiced after January 20th, 2013.

5:59 AM  
Blogger al fin said...

Right. Moving Obama out of the White House would go a long way toward eliminating the stifling uncertainty plaguing the economy as a whole -- not just the energy sector.

Basic overcapacity / undercapacity boom bust cycles have been a recurrent problem in many sectors of capital-dependent market economies for centuries.

Boom-bust cycles in petroleum have been going on since the 1800s.

Repeated boom-busts were much of the driving impetus for creating the OPEC cartel.

As for the ND laws for cementing closed wells, I suspect that is not as much a problem for shale wells, given the routine rapid turnover and depletion.

Technology for drilling new wells is becoming more efficient as well.

8:54 AM  

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