Is the Era of Abundant, Long-term, Low-cost Natural Gas Truly Here? Part II

by Bob Shively, Enerdynamics President

In last week’s blog post (Is the Era of Abundant, Long-term, Low-cost Natural Gas Truly Here? Part I) I discussed the price volatility that has impeded growth of the natural gas industry and how many in the industry feel natural gas has finally reached a stable condition of long-term abundant supply and low prices. But that may or may not be reality. Let’s examine the dialogue and data behind the future of natural gas markets:

Low Prices Are Here to Stay

In the last few years, U.S. producers have begun to successfully exploit new shale gas resources.  U.S. natural gas production in 2010 was at its highest level since 1973, and this year appears likely to hit an all-time high.  A recent study by the Potential Gas Committee suggests the U.S. total natural gas resource base is 1,898 Tcf, which at current rates of use will last 80 years.  Natural gas consumption in 2010 was at an all-time high, yet prices have still remained low.  While the number of rigs drilling for gas fell precipitously in 2009, they have started to creep back up.  And total current gas reserves are approaching their all-time high.  These factors have many predicting that we are in for at least a decade of low gas prices.

U.S. Dry Natural Gas Production in MMcf

U.S. Natural Gas Total Consumption in MMcf

U.S. Natural Gas Rotary Rigs in Operation

U.S. Dry Natural Gas Proved Reserves in Billion Cubic Feet

 source for above graphs: http://www.eia.doe.gov

Not So Fast
So is there anything looming that could turn the optimistic tide?  In a word, yes.  We need to realize that the 80 years of gas supply noted above is estimated total resource base*, not reserves. If a standard of current reserves is used, we probably have about 12 years worth of consumption in the U.S. This estimate isn’t much higher than the 10 years that was oft-quoted during the period of high prices in the mid-2000s.

In the case of shale gas, some industry experts maintain that many producers are making an insufficient profit at current prices.  Drilling has continued partly because of investments by international players who have motives beyond pure profits (see U.S. Becoming Natural Gas Exporter? in Q1 2011 Energy Insider) and partly because the value of natural gas liquids has producers drilling based on selling liquids, not gas (see http://www.bentekenergy.com/InTheNews.aspx#Article3094).  So drilling could fall and with it, supply.  And while I believe that environmental impacts of drilling techniques such as fracking are manageable, there is certainly the possibility that public perception won’t come to that conclusion and that pressure to reduce drilling will grow.

As mentioned, demand is at all-time highs. Some major industrial consumers have recently indicated plans to ramp up consumption of natural gas, and natural gas generation capacity is expected to increase by 8% in the four years from 2010 to 2014, according to the EIA.  Proposed export LNG terminals, which would access much higher gas price markets in Asia and Europe, could add an additional chunk of demand into the market.  These factors coupled with the production issues described above suggest that in another year or two, the U.S. could face falling production and rapidly rising demand.  And we all know what that does to prices!
 
So What to Do?
Certainly, history tells us natural gas goes boom and bust, and that these cycles can happen quickly.  We’ve taught in our classes for years that your best position is to accept that you can’t know whether conventional wisdom is indeed wise or not.  It is better to plan for uncertainty rather than a certain market outlook.  Wise market participants develop business strategies that are well-enough hedged that they can at least survive, and hopefully do well, in a boom, bust or something in between. 

Examples include Xcel Energy, which recently began to replace existing coal generation with over 500 MW of natural gas combined-cycle turbines. To protect rate payers against future gas price increases while taking advantage of current low prices, Excel signed a 10-year gas supply deal with Anadarko at an estimated price of $5.48/MMBtu.  Another is major shale gas producer Chesapeake, which is actively seeking new markets such as LNG exports and even gas-to-liquids (GTL) (see http://www.pennenergy.com).  These strategies seem much better than simply going along for the ride and letting fate determine the future.

* Resource base is the assumed total amount of gas, discovered or undiscovered, that can reasonably be expected to exist, while reserves are the more proven estimated quantity of gas that analysis of geologic and engineering data demonstrates with reasonable certainty is recoverable under existing economic and operating conditions.

 

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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