Tag Archives: Bloomberg

Shale Gas Reserves Could Reignite U.S. Economy

This story in Bloomberg is worth a read. The economic potential of shale gas to have a bigger economic impact is there. For the most part of its history, the Horn River News has focused on the potential of shale gas to reduce carbon emissions, and decrease US dependency on suppliers that are in conflict with with US interests.

Given the flat US economy we are seeing increasing interest opportunity in the shale gas industry as a positive contributor to the US economy. Here in British Columbia, Canada, hundreds of millions of dollars were invested into shale gas infrastructure, gas pipelines, roads, etc. All creating valuable jobs for BC.

Read: Shale Gas Reserves Could Reignite U.S. Economy

UPDATE: Business Week: Could the Shale Gas Industry Reignite the U.S. Economy?

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Natural Gas Futures Decline in New York on Abundant Supplies for Winter

By Christine Buurma – Nov 29, 2010 7:42 AM PT

(Source: Bloomberg) Natural gas futures declined in New York on speculation that above-normal supplies will limit price gains during the winter heating season.

Gas inventory levels in the week ended Nov. 19 were 9.5 percent above the five-year average, wider than a 9.3 percent surplus the previous week, the Energy Department said on Nov. 24. Colder-than-normal weather may blanket most of the eastern and central U.S. from Dec. 4 through Dec. 8, according to Commodity Weather Group in Bethesda, Maryland.

“The market knows we can handle just about anything Mother Nature can throw at us this winter,” said Phil Flynn, an analyst with PFGBest in Chicago. “We haven’t seen a price level that has caused natural gas production to fall off dramatically.”

Natural gas for January delivery dropped 3 cents, or 0.7 percent, to $4.369 per million British thermal units at 10:23 a.m. on the New York Mercantile Exchange after reaching $4.487, the highest intraday price since Aug. 9. Gas futures are down 22 percent this year.

Temperatures may be below-normal in the Southeast from Dec. 9 through Dec. 13 and normal in the Northeast and most of the Midwest during that period, Commodity Weather Group said.

The high temperature in New York on Dec. 6 may be 44 degrees Fahrenheit (7 Celsius), 2 degrees below normal, according to AccuWeather Inc. in State College, Pennsylvania. The high in Chicago may be 41, 2 degrees above normal.

About 52 percent of U.S. households use natural gas for heating, according to the Energy Department.

U.S. gas stockpiles fell 6 billion cubic feet in the week ended Nov. 19 to 3.837 trillion cubic feet, last week’s Energy Department report showed.

Thunder Bay coal plant to convert to natural gas

Horn River News: Canada needs to use more of abundant, lower-carbon natural gas for power generation, and more natural gas in the transportation network. HRN applauds Ontario Power Generations decision to convert the Thunder Bay generating station to natural gas.

(Source: Reuters) – Ontario Power Generation’s Thunder Bay generating station is set to convert its about 300-megawatt coal plant into a natural gas-fired power station before the end of 2014, the McGuinty government said in a report.

This would make Northern Ontario the first region of the province with existing coal plants to become coal-free.

There are four coal-fired power plants in Ontario all owned by OPG – Nanticoke and Lambton in the southern part of the province and Thunder Bay and Atikokan in the north.

This conversion is part of Ontario’s plan to phase out coal units in the region in an effort to reduce climate change in Canada.

Natural Gas Declines in New York on Forecasts of Above-Normal Temperatures

Natural gas futures fell in New York on forecasts for above-normal temperatures that may reduce demand for the heating fuel.

According to Bloomberg report:

Warmer-than-normal weather is likely in New England and parts of New York from Nov. 29 through Dec. 8, according to MDA Federal Inc.’s EarthSat Energy Weather in Rockville, Maryland. Temperatures may be normal in the Great Lakes region, Southeast and parts of the central U.S. during that period, MDA said.

Unfortunately, this is one of the problems with natural gas. Its’ seasonal. Demand peaks and valleys are often driven by weather conditions, primarily in the energy hungry northeastern US. Another problem here is that the weatherman is not always right and though predictions of “above-normal” temperatures can place downward pressures on natural gas prices, a cold snap can come into play – and usually does.

Rather then making price predictions for natural gas, the more important consideration is where US inventory levels will be at the end of the winter heating season. HRN pointed this out last year when 2009 winter season got off to a late start and US natural gas inventories reached a new high. Well that record high was broke this year, and we are now looking at a potentially warmer then normal winter – at least for the first few weeks. (Read HRN: US natural gas in storage hit record high on only 3 Bcf – prices down)

Some interesting factors in the Bloomberg article worth noting:

The high temperature in New York on Nov. 30 may be 56 degrees Fahrenheit (13 Celsius), 8 degrees above normal, according to AccuWeather Inc. in State College, Pennsylvania.

U.S. heating demand may be 7 percent below normal levels from Nov. 30 through Dec. 4, according to David Salmon, a meteorologist with Weather Derivatives in Belton, Missouri.

About 52 percent of U.S. households use natural gas for heating, according to the Energy Department.

A department report scheduled for release at noon in Washington may show a withdrawal from U.S. natural gas inventories of 1 billion cubic feet for the week ended Nov. 19, according to the median of 24 analyst estimates compiled by Bloomberg. The five-year average change for the week is a drop of 13 billion cubic feet, department data show.

Bloomberg: Natural Gas Declines in New York Forecasts of Above-Normal Temperatures

US natural gas in storage increases by 74 Bcf; record rigs drilling; moderate winter weather

This story continues to play like a broken record. US natural gas in inventory was increased by 74 Bcf to a total of 3,414 Bcf as of Friday, September 24, 2010, according to US Energy Information Administration (“ETA”) estimates. Stocks were 166 Bcf less than last year at this time and 202 Bcf (6.5%) above the 5-year average of 3,212 Bcf.  At 3,414 Bcf, total working gas in storage is within the 5-year historical range – but just within that range. Once again, injections were higher then forecast. Analysts had predicted an increase of 67 to 71 Bcf, according to a survey by Platts.

The risk of a hurricane disrupting gas supplies from the Gulf is dwindling leaving traders to look towards winter heating demand in the US. However, according to a Bloomberg report:

U.S. heating demand this winter will be 10 percent lower than last year from December to February, according to Commodity Weather Group LLC. Weather in the U.S. Midwest, East and South will be mostly warmer than normal this winter as the La Nina phenomenon drives up temperatures, the Bethesda, Maryland-based meteorologist said.

Add to this the fact that the number of horizontal rigs (mostly shale-gas drilling) was a record 912 in the past two weeks (according to Baker Hughes Inc.) there is little reason to believe natural gas prices will be increasing anytime soon.

In the same Bloomberg report Chris Kostas, a senior analyst at Energy Security Analysis Inc. is quoted:

“Shale-gas rigs are still increasing quickly and that portends increasing supply into the winter.”

Shale production is increasing. US Energy Department data states that production from shale wells rose 71%  in 2008 to 2.02 trillion cubic feet compared to the previous year. Shale gas is expected to account for 34 % of total output in 2035, which is double the 17% that shale gas accounted for in 2008.

As we continue to add to supplies it will be interesting to see if the total amount of natural gas in storage will approach the physical storage capacity of the US like it did last year when winter got off to a late start.

It is becoming more apparent that shale gas can make up for declining conventional sources of natural gas but can it do so in a robust, growing economy (not that the US has to be concerned about that anytime soon). However, all cycles do come to an end. HRN still supports the increased usage of natural gas within the overall energy mix as a way to reduce carbon emissions and reduce US dependence on OPEC oil.

Bloomberg: Natural Gas Spread Narrows to Record Low as Risk Shrinks: Energy Markets

US natural gas in storage increases 103 Bcf – Short sellers cover

US natural gas in storage increased by another 103 Bcf to a total inventory of 3,267 Bcf as of Friday, September 10, 2010, according to Energy Information Administration (“EIA”).

Stocks were 182 Bcf less than last year at this time and 192 Bcf above the 5-year average of 3,075 Bcf. Comparing to last year is not as relevant as the five year average as last year was a year of above average natural gas in storage.

Despite the increase, natural gas prices were up for the fifth straight day as concerns that a tropical storm may evolve into a Gulf of Mexico hurricane were enough to have short sellers covering.

Steven Schork, president of Schork Group Inc., a consulting company in Villanova, Pennsylvania was quoted in a Bloomberg report;

“There are worries about the potential storm and traders are covering some shorts.”

At this point the possiblity of a Gulf Hurriance reaching the coast of the US and disrupting natural gas supplies is still not probable… just possible. And if a hurriance fails to materialize then the five day run on increasing natural gas prices will likely be short lived as natural gas producers continue to inject more natural gas into the system.

Teri Viswanath a director of commodities research at Credit Suisse Securities USA in Houston stated in the same Bloomberg article:

“We are now going to whittle down the year-over-year storage deficit and we believe the next three successive storage injections are going to be very big unless we have a Gulf shut- in.”

Time will tell. And in the meantime the traders will speculate and ignore the fundamentals in the short term betting on or against the weather and its potential impact on natural gas supplies from the Gulf.

More natural gas then we know what to do with…

With a global glut of supply in natural gas, many analysts and commentators seem to be singing the same song… “we have more natural gas then we know what to do with”.  There are several factors that have contributed to creating a “perfect storm” for natural gas – recession (demand destruction); technology (increased supply by unlocking  shale gas); and global distribution (international LNG). There are some lesser thought of factors  that are contributing to the natural gas glut.

The most recent woes for natural gas supply forecasts comes from the International Energy Agency where Qatar’s Energy Minister has stated the glut in supply may last through till 2012.  While technology has unlocked massive reserves of natural gas from shale rock formations in North America, there are also new projects in Qatar and Peru.

Qatar, is in an especially challenging situation and key player in international natural gas markets. According to consultant Wood Mackenzie Ltd, as natural gas tripled from 2002 to  2008, Qatar increased investments, and decided not to lock in prices in anticipation of selling at higher prices. However, the global recession resulted in  demand destruction and natural gas prices crashed. Qatar was left with an abundance of natural gas sitting in LNG container ships with no contracted buyers.

Tony Regan, a consultant with Singapore-based Tri-Zen International Ltd. and a former executive in Royal Dutch Shell’s LNG business is quoted:

“Qatar has had to supply the U.S., even though the returns are absolutely awful, because it is the sink for cargoes that can’t go anywhere else. It’s the worst possible moment to increase production, because the world is in recession and prices are so low.”

But as HRN has often stated, this glut in natural gas supplies is where the opportunity lies. While many sing the “more natural gas then we know what to do with”… HRN and others can think of lots of things to do with natural gas which will leverage this new abundance of natural gas as an affordable  lower carbon alternative to coal and gasoline. It seems from time to time HRN articles always end on this note. The point is we have been yelling from the rooftops about how much natural gas we have in the world, and we need to use more of it in transportation and power generation in a tangible effort to reduce carbon emissions. In the case of the U.S. natural gas is also a security issue. The U.S. exports trillions of dollars to unfriendly countries to buy there oil. The U.S. consumption of oil will not be replaced by natural gas but a very sizable chunk of oil imports can be offset by natural gas. Domestic U.S. natural gas, as well as production in Canada, and Qatar can ship surplus to the U.S. to meet demand for years (See Pickens Plan).

It is worth noting that Qatar is one of the leading developers for natural gas technology. Back in October Qatar Airways was the first (See HRN: Qatar Airways makes history with natural gas fuel). It would be good to see more of this type of R&D taking place in North America,  and seeing more corporations changing over to natural gas as part of their long term plans (like AT&T See HRN:

Bloomberg: Natural Gas Glut Overwhelms Speculators, Defies Rally

Do shale gas drill results justify shale-gas forecasts?

According to oil geologist Arthur Berman, company production projections for shale gas  in the U.S. are at least double what drill results justify. Mr. Berman’s claims are nothing new. He has been a long time shale gas skeptic, but he is making headlines now because his public statements calling shale gas a “speculative bubble” have prompted  a response from many industry players such as Chesapeake Energy Corp.  and Devon Energy Corp. who have outright rejected Mr. Berman’s claims.

Mr. Berman does not dispute the shale gas is there, but argues that the decline rates used by the industry under-play the true rates of decline at the average shale gas well. He simply disagrees with how producers are interpreting the data.  Mr. Berman claims to have reviewed data for thousands of wells and sets his own projections at an average output of less then 1 billion cubic feet per horizontal well. But this assumes that Mr. Berman is looking at the same data as the energy companies which are likely to keep relevant data confidential and proprietary. A spokesman from Quicksilver has stated that Berman underestimates Quicksilver’s Barnett Shale production by using data from the Railroad Commission that does not include natural-gas liquids.

The technology and processes for unlocking natural gas from tight shale rock formations is relatively new and  highly specialized to say the least. So while Mr. Berman believes operators are being overly optimistic, there are those that question Mr. Berman’s research and shale gas experience.

“Mr. Berman doesn’t have the experience in unconventional gas projects to validate his assertions”; Mr. Dave Pursell, Managing Director, Tudor, Pickering, Holt & Co. (Investment Bank)

One of the easiest ways to get media attention is to take an opposing opinion or position to the prevailing trend. Especially, if the common consensus is of massive scale like the potential of shale gas as a so-called “game-changer” in the North American energy markets, and perhaps around the world. If there is anything  good to come out of Mr. Berman’s claims it is healthy debate which does force operators to reaffirm their forecasts. Which they have done.  Steve Dixon, CFO of Chesapeake Energy devoted part of Chesapeake’s analyst and investor meeting on October 14 and several others have responded and restated their experiences with their respective shale plays.

And while Mr. Berman risks little in expressing his opinion, the energy companies are risking billions and did not do so based on a preconceived plan of deception. No single person at a large operator analyzes the data and makes the investment decision alone. The energy companies have large teams of geologists that crunch over the data before taking a calculated risk to invest. Billions are invested so these calculations are not taken lightly. Most major producers are publicly traded companies where regulations provide a framework for projections. Companies  need to carefully consider the low, medium and high case in production forecasts. The point here is that major operators are investing billions into shale gas after extensive analysis and ground work and exploratory drilling.

Mr. Berman’s  suggestion that shale gas is a “speculative bubble” is to misuse a term that is generally associated with a spike in asset values within a particular industry, commodity, or asset class. This is certainly not the case for natural gas prices and for those producers that have seen market caps decline along with natural gas prices. If there was a “speculative bubble” in energy it was two years ago when energy prices were hitting an all time high. (And if you really think about it… it would be Mr. Berman that would be promoting a “speculative bubble” in natural gas prices by suggesting that there is much less natural gas then the operators suggest).

With this said, forecasting is not an exact science and unforeseen circumstances – good and bad – inevitably come into play. No company can guarantee future results; and no company has ever met production forecasts to the decimal point. Some wells  exceed expectations and some fall short and some are a “bust” and simply  not economical. The same will hold true for the production decline rates. Some will decline faster, some will not. Hopefully, Mr. Berman does not claim victory by stating “I told you so” by focusing on those wells that do not meet forecasts or are simply uneconomical and shut in.

What Mr. Berman is ultimately saying is  “I’m right. And everyone else is wrong”. The difference is that the natural gas operators are following up their analysis by investing billions.

Bloomberg: Shale-Gas Skeptic’s Supply Doubts Draw Wrath of Devon

Natural gas prices may double to US$7+ in the next year

It is a simple equation of supply and demand.

Step 1. Massive shale gas discoveries in the USA and British Columbia brought an increased supply of natural gas to the market. The recession has seen traditional industrial consumption of natural gas decline.

Increased supply +  decreasing demand = lower prices.

Step 2. Producers start shutting off production. Exploration and development activity is postponed as lower prices do not make economic sense for larger corporations. Lower production levels no longer fully replenishes inventory supplies.

Step 3. Stored inventories of natural gas supplies start to decline even under lower demand conditions.

Step 4. Supply falls faster then demand.

Step 5. Supply falls below demand. Prices come under upward pressure but supply continue to fall as producers wait for solid trend indicators.

Lower supply + higher demand = higher prices (Note: Demand does not necessarily have to increase. The point here is that supply fulls below current lower demand resulting in a demand that is now higher then the inventory supply)

Step 6. Higher prices justify increased production, exploration and development.

This is a simplified sequence of events with many factors taking place that can impact the process. The important lesson here is that supply falls faster then demand and eventually surpasses lower demand levels. It is at this key juncture that industry scrambles to meet the demand and prices will likely start to appreciation appreciate again. The risk is they could spike up and the choke on supply comes down the pipe.

According to the US Energy Department ~45 percent of US rigs have been shut since September which means Q4 gas production will tumble 5.2 percent, faster than the 1.9 percent decline in use. In January 2009, the Alberta rig count was the lowest it has been since 1993 with only 36% of the Alberta fleet active. (Operators moved 15% of the Alberta fleet to BC and Saskatchewan). John Tasdemir, Analyst with Tristone Capital, projects 2009 will see lower exploration with 14,500 new wells to be drilled in Western Canada, compared with ~17,000 in 2008. Drilling activity was at a peak of  22,000 in 2006 when natural gas prices rapidly appreciated on supply constraints and sharp demand.

One concern that makes the puts increased drilling activity at risk is the impact of current market conditions.  Investment banks and private equity are holding onto capital tighter then before and may be slower to respond even when prices start to appreciate and drilling activity would lag behind struggling to keep up with demand. Prices would continue to be under upward pressure.

According to a Bloomberg News survey of 20 analysts, natural gas prices will rise to US$7 per million British thermal units by January from US$3.85 today on the New York Mercantile Exchange representing the largest gain since the first half of 2008.

What some of the industry players are quoted as stating:

Martin King an analyst at Calgary- based FirstEnergy Capital Corp. states, “We’re starting to see a downward production trend” for natural gas”.

Larry Nichols, CEO of Devon Energy Corp. states, “When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up. The drop in supply will be so steep, it could easily catch up to where demand has dropped to before the recession ends”.

Stephen Schork President of the Schork Group Inc. energy markets consultant in Pennsylvania stated, “The next big move for gas is obviously going to be up. If we are higher, I’d expect to see us at $7 by the start of next winter”.

Theresa Gusman, head of equity research for Deutsche Bank, New York, states, “These dramatic cutbacks in capital expenditures are going to lead to shortages as we move through this recession and come out the other end”.

Bloomberg.com – Natural Gas Rigs Shutting Means Prices May Double”