Skittish outlook for natural gas

Gary Park

For Petroleum News

For the first time in recent years, there’s a debate taking place over how high natural gas prices might be heading and not much agreement over what it might mean for a languishing upstream sector.

Among analysts some see the price recovery continuing beyond its current five-year price deck of $4.50 per million British thermal units on the New York Mercantile Exchange, and C$4 per gigajoule at the AECO hub in Alberta, and others say there is no cause for excitement among producers, especially those in the high-cost plays of Western Canada.

Husky Energy executives wasted no time shooting down any talk of money being shuffled from liquids to dry gas.

Currently Husky uses about 80 percent of its 540 million cubic feet per day of output as a hedge against gas it consumes in its thermal recovery heavy oil operations.

Rob Peabody, the company’s chief operating officer, said Nymex gas would have to reach $5-$6 per million Btu before capital was redeployed from higher-netback oil and liquids production.

Chief Executive Officer Asim Ghosh noted that even in U.S. resource plays gas-targeted rig counts have been “coming down.”

Breaking the $5 barrier

And he suggested that the market is missing signals that the price is destined for a gradual recovery.

Baumgart said current prices of $4 are causing stagnation in gas drilling because producers cannot afford new wells, but he suggested that the “low-hanging fruit” in shale plays is being picked, which means future gas development will require a higher price.

He also said something will have to happen to close the gap between North American prices of $4 compared with $8-$11 in Europe and $12-$15 in Asia, where gas is priced off the global price of oil.

Baumgart noted that North American gas over the past year has traded at prices last seen in the 1993-97 period, but a more normal 2012-13 winter has pushed gas in storage below the five-year average, leaving a “big hole” of 4.4 billion cubic feet per day to fill, when less than half that amount being available due to a near-term supply decline.

The natural gas rig count has fall to fewer than 400 rigs today from 800 in early 2012 and the number of unconnected wells has dropped to 280 in the Haynesville play from 650 at the start of 2012.

Baumgart said operators in western Alberta who are focused on liquids-rich gas plays face constraints in accessing processing capacity for gas and liquids, with the Nova transmission system having contracted 90 percent of its capacity.

He acknowledged that there is no reason for producers to shift from the $100 per barrel they can receive for crude to $4 for gas and, even if they did want to drill for gas they would have trouble attracting interest on the equity markets.

FirstEnergy outlook up

For 2014, FirstEnergy’s forecast is unchanged at $4.75, while AECO has edged up to C$4.42 from C$4.34.

King said that refilling storage will be challenging in an environment of flat to declining supplies, while structural demand is rising for industrial and power generation.

“If you continue on the price path we’re seeing right now ... that is certainly not enough to get large-scale producers to put more rigs in the field,” he said.

Patricia Mohr, Scotiabank’s chief commodities analyst, said she does not see gas rising much higher than today’s level and is forecasting 2013 prices of $3.75-$4 per million Btu, compared with $2.53 at this time last year.

“If the price moves up much more, coal will probably become economic once again for electricity generation in the United States and some utilities will shift away from natural gas,” she said.