Tag Archives: US Energy Department

Mexico’s Demand for Natural Gas Spurs Pipelines, Disputes

July 15 (Source: Bloomberg) — More than 700 miles of new pipelines in Texas are being built to ship more of the state’s natural gas to Mexico, raising concerns from U.S. environmentalists who want to see low-carbon renewable energy grow instead.

Exports of gas to Mexico are expected to grow dramatically by the end of the decade. While the U.S. has a long history of pipeline exports to Mexico, the explosion of new pipeline construction is raising environmental concerns about wild landscapes, an expected expansion of hydraulic fracturing, and greater use of natural gas instead of other sources of energy such as solar and wind.

But Texas, with bountiful supplies as a result of the shale boom, sees opportunity for exports south of the border.

“Having an opportunity like the Mexican market does help Texas producers and the industry, especially in a time when prices are lower here and demand is lower,” said Brian Kalinec, an independent geophysicist in Houston. “You are basically filling in demand if an opportunity exists and I think that any Texas producer close to the border would consider these possibilities.”

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US natural gas in storage record high on only 3 Bcf – prices down

US natural gas in storage was up 3 Bcf to stand at a new record high of 3,843 Bcf (0.3% higher then 2009 record) as of Friday, November 12, 2010, according to the weekly report from the Energy Information Administration (“EIA”). Although the injection was lower than expected, markets still responded to storage levels breaching 2009 heights and as a result,  natural gas prices dipped down below $4. Inventories are now 13 Bcf higher than last year at this time and 327 Bcf (9%) above the 5-year average of 3,516 Bcf. At 3,843 Bcf, total working gas is above the 5-year historical range.

So we are now at the tipping point. As always and despite delays, winter arrives. Once winter season kicks in, consumption of natural gas in storage will be greater and faster then production can add into the system – regardless of current production levels (which are higher then historical levels). This is apparent with the single digit injection into the system. So we enter into a normal winter cycle for natural gas. Not quite.

As stated last year on HRN at this time, the trend to watch here is how the US has now set two consecutive storage records at the beginning of the winter heating season. Gas stockpiles may total 1.776 trillion cubic feet at the end of this winter heating season in March, up about 114 billion cubic feet from a year earlier, according to Energy Department estimates. Under average winter condititions this means that the winter heating season will end with a record amount of natural gas still in storage while producers continue to lower costs and increase production. To illustrate, lets say it takes 50 litres of gas to fill your tank. You let it run bone dry and put 50 litres in each week. But you dont drive as much, and when it comes to your weekly fill of 50 litres, your tanke is not bone dry. To emphasize, think if you then try to add 60 litres one week. You get the point.

US producers recognize this trend. In Canada, there has always been a surplus of natural gas and they have been a net exporter – to the US – of natural gas. However, with the US production levels reaching new highs, the US is also facing the probabilites of being a net exporter of natural gas (See HRN: US to provide clean low cost energy to China)

If you read any of the articles on the Horn River News you are aware that HRN is pro-natural gas as a cleaner alternative energy source to oil and coal. It is now clear that production from shale gas has proven the abundance of natural gas available in the US and Canada. Its a free market so if producers can not sell their gas in North America they sill seek markets overseas. Fair enough. But we continue to emphasize this is a opportunity lost that may have huge negative impact on North America down the road. By exporting lower carbon energy sources we are exporting an energy resource that will become increasingly important in a world pressured to lower carbon emissions (not to mention the economic benefits of domestic energy – compared to acquiring energy from “unfriendly” US sources. See Pickens’ Plan).

So as we see a trend to increasing natural gas supplies, Canada and the US can either increase domestic usage of this surplus or export it to the benefit of others. In Canada’a case their will always be a net surplus for export – perhaps referrably to the US – but in the US, this surplus can be easily put to good use, with extra supplies readily available from an established Canada-US distribution system. The bottom line is this resembles the same relationship Canada and the US had previous to the shale gas boom. But now with greater volumes of natural gas readily available, we simply need to increase consumption in transportation and power generation to offse some of the oil and coal used in these areas.

Natural gas in storage as summer comes to an end and lower prices are predicted

Natural gas in storage  increased by 58 Bcf from the previous week for a total of 3,164 Bcf in storage as of Friday, September 3, 2010, according to US Energy Information Administration (“EIA”). This represents a net. Stocks were 218 Bcf less than last year at this time and 166 Bcf above the 5-year average of 2,998 Bcf.

And as summer comes to an end and temperatures moderate demand will for gas- fired electricity to run air conditioners will moderate as well.  A Bloomberg News survey reports that “7  out of 18 analysts, or 39 percent, forecast gas futures will decline on the New York Mercantile Exchange through Sept. 17. Five, or 28 percent, predicted prices will rise and six said there would be little change. Last week, 41 percent of participants said gas would fall.”

Natural gas prices have come off nearly 24% since the end of July as higher amounts of natural gas in storage were suffecient to meed demand from gas-fired power plants.  About 23% of U.S. electricity is generated using natural gas, according to the US Energy Department.

Bloomberg: Natural Gas Futures Seen Falling Next Week as Cooler Weather Cuts Fuel Use

Natural gas inventory up – price down – Enerplus invests $406M in natural gas play

Natural gas futures fell below $3 for the first time in more than seven years after the Energy Information Administration (“EIA”) reported rising supplies. According to today’s weekly Natural Gas Report, U.S. inventories were up 52 billion cubic feet to 3.204 trillion in the week ended August 14. No surprise here.

However, the key data we are looking for in the report is the week over week amount coming into storage. For the week of August 7th  natural gas increased by 63 billion cubic feet (Bcf) to 3,152 Bcf for that week so this week’s increase is down 11 Bcf or ~17%.

This decline could indicate that the shut-ins by major natural gas producers may be having an effect. The increase in gas inventories have been projected by many who forecast inventories to reach an inflection point in the August/September time frame and then experience sequential monthly declines. Tristone Capital of Calgary was quoted as stating in a report last month:

“We expect U.S. supply will peak in the next two months and hit an inflection point of sequential monthly declines beginning in the month of August. The drop in supply will begin to accelerate as we enter the heating season, with our expectation that we are down nearly 4 [billion cubic feet per day] year-over-year by the start of winter and the supply shortfall grows to 5.5 bcf/day lower year-over-year by late [in the second quarter of 2010].”

Its never a question of when and if prices go up and down. The key question on every investors mind is “when”? Certainly it would not be surprising if Tristone was off by a few weeks in their forecast. They seem to provide more detail in their analysis then most however it would seem the decline in the weekly increase over the last number of weekly reports would seem to support the forecast time frame. In the short term the real risk is that inventories are reaching their physical capacity which could have further downward pressure on the prices before sequential monthly declines really have an impact. As the saying goes… “Its always darkest before the dawn”.

Note: Watch for a new post on making the bull case for natural gas – coming soon.

So, why is Enerplus investing $444 million dollars into a shale gas play when natural gas prices are in the tank?

Enerplus Resources Fund, a Calgary based oil and gas trust, announced it will pay $406 million USD to Chief Oil & Gas LLC (and its affiliates Chief Exploration & Development LLC and a limited partnership managed by Tug Hill Inc.) for 30% of their interest in the Marcellus shale natural gas play.According to Enerplus, total consideration for the acquisition of US$406 million, comprising US$162.4 million in cash to be paid upon closing, and US$243.6 million to be paid as a carry of 50% of the sellers’ future drilling and completion costs in the Marcellus shale play. ERF.UN (TSX) fell 14 cents to $22.59.

Chief Oil & Gas owns ~72% average working interest in 540,000 gross acres of property primarily in Pennsylvania within the heart of the Marcellus shale zone. Chief is the operator on the prospect. Enerplus will own an average 21.5 per cent non-operated working interest or about 116,000 net acres  in the gas fields.

The fast answer is buy low, sell high. As a natural gas trust, Enerplus is a long term investor in natural gas and is simply making an acquisition on the lows looking at the cycles. Many majors understand that low prices present M&A opportunities and attractive returns when viewing the long term prospects for natural gas prices. The major players – producers and institutional investors – will quietly invest in natural gas and start promoting it to the world on the first sign of appreciation. In fact, this acquisition may have brilliant timing if some analysts – like Tristone – are correct in their estimate of natural gas prices firming up in Q2 2010.

US Congress approves $150 million for natural gas vehicle research


Natural gas vehicles are lacking in North America

The US Congress has overwhelming voted for a bill authorizing $150 million (USD) for the US Energy Department to conduct a 5-year research program on natural gas vehicles (“NGV”).  According to reports the program will be for “the continued improvement and development of new, cleaner, more efficient light-duty, medium-duty, and heavy-duty natural gas vehicle engines.” The first $30 million will be available in the 2010 budget.

The overwhelming support for the bill (393 For vs. 35 Against) is further evidence that the US Congress recognizes the benefits of natural gas and is moving towards increasing the use of natural gas to reduce dependence on foreign oil and  reduce carbon emissions. It is becoming increasingly obvious that the demand for natural gas will be going up in the US not only from an improving economy, but from its increasing share of the energy mix. And it should. It is abundant, clean and proven as a reliable source of energy in electricity generation and in motor vehicles.

Natural gas has been on quite a role in the last couple weeks. Earlier this month, the Natural Gas Act (“NatGas Act”) was introduced by Senate Majority Leader Harry Reid, and Sens. Orrin Hatch, and Robert Menendez along with the deep support of Texas billionaire T. Boone Pickens. (See HRN: “More tax incentives for natural gas vehicles in the United States” ) The NatGas Act would increase tax credits for buying a natural gas vehicle from $5,000 to $12,500; increase  grants to create additional natural gas filling stations and  natural gas engine development.

Shale gas discoveries in the Horn River basin of northern British Columbia and US have provided an amazing opportunity for North America to become more energy self sufficient, and reduce carbon emissions by using more natural gas in the transport network and electricity generation.

Oil to gas price ratio signals rally for natural gas

bildeNatural gas lost 72% in 11 months as the we went into the deepest recession in 50 years. Production companies scrambled to shut in production to control inventories, and shale gas discoveries brought  new sources of natural gas onto the market.

According to the US Energy Department, inventories are 22% higher then the 5-year average and oil costs 18 times more then gas representing the largest gap since 1992. History indicates that natural gas prices will appreciate and narrow the price ratio to oil gap providing yet another indicator for a natural gas rally.

Over the last couple weeks more and more  analysts have been indicating that shut in production (conventional) is reducing supplies and we will see an impact on inventories right when natural gas is going into Q3, which is historically the best performing quarter of the year for natural gas.

Just a month ago, CNQ announced plans to cut drilling activity by 50%. In Q1, the Company had drilled 70 wells, and was planning another 70 for the rest of the year compared to the 280 wells CNQ drilled in 2008. And they are not alone. In Alberta alone, the number of active drilling rigs is only about 32%.

Hot summers and hurricanes often put upward pressure on natural gas prices in Q3. Though the weather can be as unpredictable as the stock market the fact is that this summer will bring warmer weather, and there will absolutely be some hurricanes.

Here on the Horn River News we have spoke often about the implications and timing of the lagging effect of shutting in production. As a decline in production starts to have a downward effect on supply, inventories will begin to decline as well. Inventories will in fact fall faster then demand even if this demand is still in decline. Meanwhile we have seen the economy is showing some very early signs of recovery. If  the economic slowdown starts to ease, or if – and we stress if – we had a flat 0% growth rate rather then a negative number the price of natural gas could excellerate given the decline effect of shut in production and delcining inventories. Producers would again scramble to catch up to restore inventory levels and any increase in production would take perhaps several months to work its way into the system.

It appears that the natural gas prices are playing out much as expected and most are stating a rally in natural gas prices will be towards $7.00 by the end of the year. A number supported by most analysts including Tristone Capital of Calgary, and CIBC World Markets who have both recently released reports advising clients to invest in natural gas stocks. See Horn River News: ” The time to buy natural gas stocks is now“.

According to Mr. Ben P. Dell, energy analyst with Bernstein Research in New York:

“The scope for gas to rally before the end of the year is bigger than for oil. The gas market is playing out as expected. Supplies are getting drastically reduced because of falling rig counts and demand is showing signs of stabilization”.

Bloomberg: “Natural gas cheapest to oil since 1992 signals gain”

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”