Using an auto industry cure

The answer for what ails the North American natural gas sector may lie in the automotive industry’s playbook, a Calgary analyst has suggested.

Bill Gwozd, Ziff Energy Group’s vice president of gas services, said that shutting in production for a period this summer might be the best way to deal with chronic oversupply, which has driven current market spot prices under US$4 per million British thermal units, far below the marginal cost of new production of about US$9.

He told a Calgary conference June 5 that “not just in Western Canada, but overall across North America, we should consider doing what the car companies have done, laying down plants and laying down production.”

“The precedents are crystal clear. Rather than give (gas) away, we should just shut it in and wait for the price to be appropriate.”

He said US$7-$8 is a “fair” price that would allow cost-effective producers to maintain production levels, generate adequate returns for shareholders and ensure sufficient supplies for consumers.

Devon Energy Chairman Larry Nichols said June 5 he expects the U.S. gas market to rebalance in 2010 when a sharp decline in drilling and demand converge.

But he believes gas prices will remain challenged until at least November.

—Gary Park