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Wood Mac: Gas price to re-link with oil Historic ratio one-to-seven; study says current natural gas price lag temporary, predicts gas will be $13 to $14 by 2012 Kay Cashman Petroleum News
Selling natural gas at a discount to oil in terms of relative heat content is about to end, Wood Mackenzie said.
In a study released at the annual American Association of Petroleum Geologists convention in San Antonio, the world-renowned energy consulting firm predicted natural gas would return to its historic one-to-seven price relationship with oil in North America by about 2012, a shift the firm calls “price re-linkage.”
As of April 22, natural gas was selling for about one-eleventh the price of oil in the United States, even though a million Btu of gas has about one-seventh of the Btu of oil.
“Under current market conditions, with oil pricing over $100 a barrel, a re-linkage would mean gas prices of as much as $13 or $14,” Ed Kelly, Wood Mackenzie’s vice president of North American gas and power, said in an April 21 press release.
Soaring oil prices, combined with pressure on natural gas prices from increased North America supplies, has disrupted the historical relationship between oil and gas, Wood Mackenzie said, crediting recent shale gas plays as a major factor.
When re-linkage occurs will depend on the long-term race between U.S. domestic supply growth and the growing reliance on gas for power generation, the firm reported.
“Domestic supplies could insulate North America gas prices from rising oil prices over the next 3-4 years, but our analysis concludes that around 2012, there will be a re-linkage to the oil price,” Kelly said, adding that there would be clear indicators before a re-linkage occurs, one of which could be a temporary seasonal link to the United Kingdom.
“High prices and technical drilling advances have spurred record drilling levels and revived domestic U.S. supplies and this will be enough to stave off the re-linkage for the next 3 to 4 years,” he said.
Wood Mackenzie’s report said that most of the domestic supply growth will come from unconventional gas supplies, including tight gas, coalbed methane and shale gas. In fact, Kelly’s presentation shows that the majority of new supply will come from shale gas — as much as 3 billion cubic feet per day, or between 50-60 percent of all net U.S. production growth expected between 2007 and 2011.
Other key factors that have a part to play on North America’s natural gas demand and supply balance include the impact of rising coal prices, power sector demand and the influence of carbon legislation, the shifting Canada supply-demand balance and an associated reduction in gas exports to the United States, and the building and cancellation of coal plants.
LNG ties gas more closely to oil “The picture beyond 2011 remains uncertain due to the lack of viable alternatives” to natural gas for power load growth, Kelly said.
Gas supplies are growing “and will do so in the midterm but beyond 2012 these level off,” he said.
“This leveling combined with a quick growth rate from the power sector,” could mean an increased reliance on liquefied natural gas. However “relying on LNG will tie gas prices more tightly to oil. Hence in the long term, if oil prices remain high, we could see gas prices following suit,” Kelly said.
Editor’s note Btu stands for British thermal unit, a unit of energy. In North America Btu is used, among other things, to describe the heat value (energy content) of fuels.
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