|
Natural gas price heralds Arctic boon Price rebound and supply-demand outlook support notion of staying power for $10 gas; Lippe doubts $120 oil will continue Gary Park For Petroleum News
For those trying to get a fix on the long-range outlook for natural gas prices as they wrestle with the daunting economics of Arctic projects in Alaska and Canada there has been a sudden lift from analysts who believe rebounding gas prices, pulled along by rising crude oil prices, are here to stay.
The short-term blips have never been enough to sway those making multi-billion-dollar decisions on North Slope and Mackenzie Delta developments, but they have reason to draw hope that the return of gas prices to $10 per million British thermal units (MMBtu) might have some staying power.
In Canada that is combined with word from the consulting firm of Ziff Energy that the 25 largest Canadian producers failed to replace their gas reserves in 2007, the first time since 2003. (The top 30 producers in the Lower 48 representing one-half of U.S. production replaced just over 200 percent of their reserves).
The pressure to keep Canada’s output at its current level of 17 billion cubic feet per day is a constant treadmill for the industry, even though the new resource plays in the Upper Montney and Horn River Basin shales are a source of new hope.
But, if new reserves are to be found they need the support of strong current prices and a robust outlook.
Calgary-based FirstEnergy Capital is confident about the latest price resurgence, raising its price forecast twice in 45 days.
FirstEnergy vice-president Martin King told an industry gathering in Calgary that the price turnaround has been “phenomenal … generally, there has been a lot of fundamental factors out there, some demand growth as well, that explains why prices are strong.”
In addition to the return of a more normal winter demand and a strong storage pull in the United States, prices have been boosted by “genuine constraints” on some supply sources, he said.
Rising U.S. consumption, the scramble to refill U.S. storage, shrinking Canadian supply and the “tightest” liquefied natural gas market in history will offset gains in U.S. production, resulting in strong pricing in 2008 and 2009, he said.
FirstEnergy is now targeting an average $9.75 per MMBtu this year and $9.50 in 2009, with its forecast for the key AECO hub in Alberta at C$9.01 per gigajoule for both years.
Beyond 2008, King said the gas market will stay buoyant as climate change regulations intensify the demand for gas-fired power generation.
He said FirstEnergy believes “low double digit gas pricing will become a reality, given that North America has to migrate closer to global gas price levels.”
Upper Montney, Horn River near term For the nearer term Canadian attention is turning to the Upper Montney and Horn River as the best hope to sustain supply levels.
Robin Mann, chief executive officer of AJM Petroleum Consultants, told an investor conference in Toronto on May 1 the Upper Montney has estimated gas-in-place of 50 trillion cubic feet.
Even if only half that potential turns out to be recoverable it will be a “major resource we didn’t even have two or three years ago,” and provide a significant lift to current 58 tcf of estimated conventional gas potential in the Western Canada Sedimentary Basin, he said.
But the job of maintaining current output levels in Canada requires 3.5 billion cubic feet per day of new volumes every year, assuming an average 20 percent decline rate and an average 300,000 cubic feet per day from each new well that comes on stream, Mann said.
19,000 well completions per year Achieving that basic requirement needs an annual tally of 19,000 well completions (about 65 percent targeting gas) in Western Canada, compared with AJM’s forecast of 17,000 this year, down from 18,600 in 2007.
That underscores the importance of the new plays, which Mann said could lead the way to many other shales and projects that are now possible because of the “technologies that will be developed for these types of plays.”
Based on current wells, the average deliverability is 1.3 million cubic feet per day for vertical wells with reserves of 1.6 billion cubic feet per well and 3.5 million cubic feet per day for horizontal wells with reserves of 4.3 billion cubic feet, Mann said, estimating well costs at C$3 million to C$5 million.
Investment dealer Peters & Co. said most horizontal Montney developments are economic at gas prices of C$6.50 per thousand cubic feet, with hope of “already superior returns” improving as operators and service companies gain experience.
In the Horn River, where EOG Resources has announced a potential 6 tcf find on its 140,000 acres, potential well resources are estimated at 4 to 6 billion cubic feet per well, with deliverability up to 8 million cubic feet per day per multiple segment well.
Current well costs in Horn River are about C$10 million, but some operators are now reporting a drop to the C$6 million-C$8 million range.
If oil hits $200, gas $16.50-$20 But Arctic players trying to get a handle on where the gas sector is headed might have found more reason for hope than they have ever held with recent comments by Peter Beutel, president of the Connecticut-based consulting firm Cameron Hanover.
Referring to the no longer unthinkable prospect of oil hitting $200 per barrel, he said that if ever that happens “it would be kind of hard for natural gas to not be at something between $16.50 and $20” per MMBtu.
Assuming the U.S. dollar remains weak and serious constraints on oil supplies, “gas would go along for the ride,” he said.
But such a surge could also be accompanied by a “massive recession,” demand destruction, conservation measures and more affordable alternative energies if gas prices went into decline.
However, Beutel said higher gas prices could conceivably result in the United States lifting its ban on drilling in the 1002 area of the Arctic National Wildlife Refuge, allowing E&P companies to pursue those controversial supplies.
Gas on par with oil by 2012-13 Amid this speculation there is the unending debate over whether gas prices should be linked to oil.
Andy Weissman, senior managing director at FTI Consulting, said that although the two commodities basically decoupled two years ago, he expects that by 2012 and 2013 there is a “high probability” that gas will be on par with oil and possibly sell at a premium.
Dismissing Energy Information Administration predictions that oil will fall to $70 per barrel, he said there is a “very high risk” that in another five years the U.S. could face a severe gas supply and demand crisis.
Dan Lippe, president of Petral Worldwide Consulting, said that if oil ever hit $200, fuel-switching competition between residual fuel oil and gas could drive gas to $20 per MMBtu.
He said that if fuel oil reaches $140 per barrel (the equivalent of $200 per barrel for conventional oil) gas prices would be $20 per MMBtu after allowing for current discounts of $3-$4 per MMBtu.
However, Lippe does not think $200 oil is in the cards, doubting that even $120 can survive indefinitely beyond summer.
Even so $120 oil and $11 natural gas are sufficient to spur production and technological advances will make feasible the development of previously-unattainable resources, he said.
| 