Natural gas prices rise, benchmark oil up slightly
April 28, 2012
By SANDY SHORE, AP Business Writer–8 hours ago
Battered natural gas prices are getting a bit of a break as cooler spring weather raises expectations that demand may improve.
Natural gas rose 6 cents to finish at $2.186 per 1,000 cubic feet in Friday trading. That’s up nearly 15 percent from April 19 when the price hit the lowest level in more than a decade at $1.907 per 1,000 cubic feet.
The price has plunged this year as a natural gas production boom created a glut of supply and demand dropped during a mild winter.
Now, some in the market are suggesting demand will strengthen, which help boost prices.
Cooler weather moving across the Northeast, parts of the Midwest and the Rockies this weekend could prompt homeowners to turn up the heat, creating more need for natural gas.
In addition, utilities have been substituting cheaper natural gas for coal to generate electricity. As much as six billion cubic feet a day of natural gas has replaced coal-fired power generation this year, said Ron Denhardt, an analyst with Strategic Energy & Economic Research. Consumption on an annual basis is about 66 billion to 67 billion cubic feet a day.
In addition, some energy companies have cut production because low prices can make it unprofitable to drill for some types of natural gas.
Yet, several analysts believe any rally will be short-lived.
With May upon us, any pick-up in demand for heating will be brief. About 70 percent of the nation’s demand for natural gas comes during the winter to heat homes and businesses.
Natural gas inventories continue to build. Analysts say that underground storage could be filled to the brim by fall without additional production cuts or an extremely hot summer that boosts electricity demand for cooling.
“It’s fundamentally a disastrous market,” Denhardt said. “I can’t see any turnaround of any significance before November, December of this year.”
PFGBest analyst Phil Flynn said there has to be an even bigger drop in price to force companies to cut more production. He speculated that the price will test an all-time low of $1.35 per 1,000 cubic feet.
In other energy trading, oil prices rose slightly, as traders shrugged off a report that the economy grew more slowly in the first three months of the year as governments spent less and businesses cut back on investment. But consumers spent at the fastest pace in more than a year. The Commerce Department said Friday that the economy grew at an annual rate of 2.2 percent in the January-March quarter, compared with 3 percent in the final quarter of 2011.
Benchmark oil rose 38 cents to end at $104.93 per barrel in New York. Brent crude fell 9 cents to finish at $119.83 per barrel in London. Heating oil lost 1.37 cents to end at $3.1807 per gallon and gasoline futures rose 2.29 cents to finish at $3.2062 per gallon.
At the pump, gasoline prices were little changed at a national average of $3.826 per gallon, according to AAA, Wright Express and the Oil Price Information Service. That’s 8.5 cents less than a month ago and 5.3 cents lower than a year ago.
Copyright © 2012 The Associated Press. All rights reserved.
The Dilemma
September 23, 2011
Natural Gas prices continue to be very competitive.
However…
This has presented a dilemma.
When you request pricing for an existing client,
Who has been participating in the deregulated market…
And
You compare the proposed price
vs
What the client has paid over the past 12 months.
Guess what???
The price normally is higher than what they have paid.
The client’s response normally is:
Why is it more?
Why can’t I play less?
That’s a good question,
Now what answer do you
want?
Let’s just stick to
the facts
The truth is that the natural gas market is a moving target
It is a commodity that is being traded 24/7
Several years ago (2008),
Natural gas prices shot up
Market prices were $12 – $14 a decatherm
Which translates into $1.20 – $1.40 a therm
That was the commodity cost to the providers
So consumers were even paying a higher rate
Since that time, prices have steadily dropped
You have probably seen me reference
That many analyst saw natural gas pricing
Reach a floor in
Late October / November 2010.
Problem is….
That nobody knows where the floor is…
Until you pass it
Well guess what??
Prices may once again be creating a floor as we speak.
The Nymex continues to drop
It has gone full circle over the last year
What do you mean the
last year?
It has gone full circle over the past 2 months
I have a friend, who
is a chiropractor,
He asked me what is
wrong with my neck.
I told him I have been
watching the Nymex!!!
The problem becomes….
There is more upside risk
Then there is downside risk.
Translated……
How much lower can prices go?
All future indications show prices going up
What are your options:
Float the market while prices continue to remain low
If you see prices starting to go up
You can always turn around and lock your position
There are various other options…
Winter locks…Lock in the price for months with the highest
usage
Basis locks….Lock in the transportation cost and float the
nymex
Anyone of these options can be used
To be proactive against future price spikes
Another issue:
We spoke in the past that natural gas prices
Are made up of 2 components
Nymex… The cost of natural gas out of the ground in Gulf of
Mexico
Basis…… The cost of transporting the gas from LA to your
local provider
Index…….The sum of the 2 or the base cost of the commodity
to the provider
While the Nymex prices are creating new floor space
The basis cost is higher than it should be
The result….
Adding a low Nymex cost
To a higher than normal basis cost
Gives you a higher overall cost
Then what you were paying over the last year
I find this all very
interesting…
(You have to say that
while you are rubbing your chin)
What should you do?
HBS presents all the options
We look at where the market has been
What are the future projections showing?
We look to educate our clients
So they have a full understanding of how the market works
We want our clients to feel comfortable
Knowing that they made the best decision
For their company
When all the facts were presented
To learn more about
deregulated energy opportunities for your business email george@hbsadvantage.com
Visit us on the web www.hutchinsonbusinesssolutions.com
Natural Gas Revolution Is Overblown, Study Says
May 12, 2011
Written by Tom Zeller Jr
For the Huffington Post
A veritable explosion in the number of natural gas wells in the United States in the late 2000′s resulted in only modest gains in production, a new study finds, suggesting that the promise of natural gas as a bountiful and economical domestic fuel source has been wildly oversold.
The findings, part of a broader analysis of natural gas published Thursday by the Post Carbon Institute, an energy and climate research organization in California, is one of a growing number of studies to undermine a natural gas catechism that has united industry, environmental groups and even the Obama White House in recent years.
It also comes on the heels of another study, published Monday, lending credence to claims that modern natural gas drilling techniques are contributing to methane contamination of drinking water wells in surrounding communities.
According to the author of Thursday’s study, David Hughes, a geoscientist and fellow at the institute, the bedrock assumptions of the natural gas revolution — that new drilling techniques have cracked open deep layers of shale and made available a 100-year supply of clean, domestic energy that could displace dirty coal and oil — are simply not true.
“The real takeaway here is scale,” Hughes said in a telephone interview. “If you look at the production estimates as the government is making them now, you’re talking about a near quadrupling of shale gas by 2035.”
The estimates come from the Energy Information Administration, which suggested in its most recent projections that shale gas would account for 45 percent of all natural gas production in the U.S. by 2035 — up from roughly 14 percent currently.
But the actual productivity profile of new, unconventional wells — often tapped at tremendous expense — is far less clear than is normally portrayed, Hughes said. Studies at existing fields, or plays, suggest that many shale wells tend to be highly productive in their first year, and then decline steeply — sometimes by as much as 80 percent or more — after that, requiring new wells to be plumbed
Indeed, while the number of active gas wells, which has nearly doubled since 1990, to half a million, has increased in the U.S, production per well has declined by nearly 50 percent over the same period, Hughes said, suggesting that as the industry converts increasingly to shale gas, more and more wells will be needed to maintain even a baseline level of production — much less to create a substantive increase.
If that’s the case, Hughes said, then those hoping that the shale gas boom might one day provide enough natural gas to replace coal for electricity generation, or oil as a transportation fuel, will be sadly disappointed. Indeed, he said, the number of new wells that would be needed to meet these goals would create a dystopian landscape of well pads and gas pipelines that few people would want to inhabit.
“If that were to happen, for those people living in Pennsylvania and New York, well, they haven’t seen anything yet,” Hughes said, referring to those states now sitting atop major shale gas deposits.
Mr. Hughes also highlighted the growing number of environmental costs that come with natural gas development. These include everything from water intensity and heavy truck traffic to the risks of localized pollution associated with hydraulic fracturing, or fracking — the high-pressure injection of water, sand and chemicals underground to break up rock formations and release gas.
More broadly, questions have been raised about the greenhouse gas footprint of natural gas development over its lifecycle, with at least one study suggesting that it may be no better than coal.
Dan Whitten, a spokesman for America’s Natural Gas Alliance, an industry lobby group, said in an e-mail message that the report was retreading old ground and amounted to a smear campaign on natural gas.
“This report is recycling the widely discredited claims of anti-drilling activists on greenhouse gas emissions,” Whitten said. “Their estimates run counter to the accepted scientific consensus and have been heavily criticized by climate scientists and others who are interested in a fact-based debate about our energy choices as a nation.”
Whitten also argued that it is now “the established scientific consensus” that the U.S. has “vast domestic supplies of natural gas that can play a growing role in meeting our country’s energy needs for generations.”
He also said that no one was seriously suggesting that coal or transportation fuel be entirely replaced by natural gas, and that such arguments amount to “unrealistic scenarios” presented by Hughes simply to be knocked down.
“Most experts in our energy debates understand and agree that it will take all kinds of energy to meet our nation’s growing future needs,” he said. “From our initial review, no new ground was broken with this report. As such, it doesn’t change the fact that the vast supplies of clean natural gas right here in North America give our country a chance to substantially improve energy security, clean our air and improve our economy.”
But while the resource is inarguably vast, Hughes is not alone in suggesting that the industry is overstating how much can be economically pulled out of the ground.
Arthur E. Berman, a geological consultant and director of Labyrinth Consulting Services, Inc., also argues that natural gas is not as abundant or as inexpensive as is commonly believed.
“I do not dispute for a minute that the resource size for natural gas is huge. There’s a lot of gas in place in shales,” Berman said in a telephone interview. “The question for me is how much can be produced for a profit?”
Berman says that reserves — meaning the amount of natural gas that is actually commercially available to produce — will last only about 22 years. This is partly because shale gas plays once touted to be monstrous in size have typically contracted to core areas of production a mere fraction of the originally advertised size.
Hughes, meanwhile, cited Berman and and other analysts who also say that gas, at roughly $4 per thousand cubic feet (mcf), is too cheap for companies to recoup the costs of producing it.
From Thursday’s study:
Analysts like Arthur Berman suggest the marginal cost is about $7.50/mcf compared to a current price of about $4.00/mcf. Others, such as Kenneth Medlock (2010), suggest that the break-even price ranges from $4.25/mcf to $7.00/mcf. The Bank of America (2008) has placed the mean break-even cost at $6.64/mcf with a range of $4.20/mcf to $11.50/mcf. One thing seems certain: Shale gas, which appears to be the only hope for significantly ramping up U.S. gas production, is expensive gas, much of which is marginally economic to non-economic at today’s gas prices.
And yet, with easier-to-reach, conventional sources of gas largely depleted, the ability to pull gas from deep layers of shale rock has been touted as a game changer, and the notion was quickly embraced by a broad cross-section of social, political and business interests.
Writes Mr. Hughes:
First, the shale gas industry was motivated to hype production prospects in order to attract large amounts of needed investment capital; it did this by drilling the best sites first and extrapolating initial robust results to apply to more problematic prospective regions. The energy policy establishment, desperate to identify a new energy source to support future economic growth, accepted the industry’s hype uncritically. This in turn led Wall Street Journal, Time Magazine, 60 Minutes, and many other media outlets to proclaim that shale gas would transform the energy world. Finally, several prominent environmental organizations, looking for a way to lobby for lower carbon emissions without calling for energy cutbacks, embraced shale gas as a necessary “bridge fuel” toward a renewable energy future. Each group saw in shale gas what it wanted and needed.
And at least for now, the 100-year slogan continues.
“A lot of times, things are right underneath our feet, and all we need to do is change the way we’re thinking about them,” says Erik Oswold, an ExxonMobil geologist, in an ad circulating on the online video service Hulu. “A couple decades ago, we didn’t realize just how much natural gas was trapped in rocks thousands of feet below us. Technology has made it possible to safely unlock this cleaner burning natural gas. These deposits can provide us with fuel for 100 years.”
President Obama, delivering a speech on energy policy at Georgetown University on March 30, echoed the industry’s mantra.
“Now, in terms of new sources of energy, we have a few different options,” the President said. “The first is natural gas. Recent innovations have given us the opportunity to tap large reserves — perhaps a century’s worth of reserves, a hundred years worth of reserves -– in the shale under our feet.”
As reported by Bipartisan Policy Center
March 22, 2011
Media Contact:
Paul Bledsoe
Bipartisan Policy Center
(202) 637‐0400
pbledsoe@bipartisanpolicy.org
Washington, DC – A national producer—consumer Task Force convened by the Bipartisan Policy Center (BPC) and the American Clean Skies Foundation (ACSF) issued a report today finding that the growth of shale gas production “reduce[s] the susceptibility of [natural] gas markets to price instability and provide[s] an opportunity to expand the efficient use of natural gas in the United States.”
The Task Force’s 70-page report, the result of a yearlong review, calls on governments to “encourage the development of domestic natural gas resources, subject to appropriate environmental safeguards” given that the efficient use of gas has the potential to reduce harmful air emissions, enhance energy security and improve the prospects of U.S.-based energy-intensive manufacturers.
With a more stable price horizon for natural gas, the report also urges state public utility regulators and industry to consider making greater use of longer term supply contracts. “Rules that unnecessarily restrict the use of or raise the cost of long-term contract and hedging tools for managing supply risk should be avoided,” the Task Force said.
“We have a good problem,” said Task Force co-Chair, Norm Szydlowski, Bipartisan Policy Center and President and CEO of SemGroup Corporation. “Finding more natural gas provides an opportunity that is as much unparalleled as it was unexpected. Fundamental changes that have taken shape in the domestic supply and demand balance for natural gas, including an unprecedented level of available storage and import capacity, should allow markets to function more efficiently and fluidly in the future,” said Szydlowski.
“The extensive work of this diverse, expert panel identifies a small number of practical regulatory and policy measures that can provide the necessary confidence to support new investment in efficient applications of natural gas,” said Ralph Cavanagh, Senior Attorney and Co-Director of the Energy Program at Natural Resources Defense Council. “If the industry can meet high standards of environmental performance for extracting and delivering the fuel, we are looking here at very good news for America’s economy and industrial competitiveness, the environment, and our nation’s energy security.”
“The Task Force findings and recommendations reflect optimism that the robust supply horizon for natural gas presents fresh opportunities—not only to move beyond prior price volatility concerns shared by both consumers and producers, but to develop new tools for managing price uncertainty,” said Marianne Kah, Chief Economist, Planning and Strategy of ConocoPhillips. “With sound policies, the nation can capitalize on this abundant natural gas supply and convert it into intelligent energy progress.”
“With U.S. natural gas now one-fourth the price of oil on an energy equivalent basis, it is further welcome news to consumers that, with the right policies, U.S. natural gas appears poised to enter into an era of greater price stability,” said Paula Gant, Senior Vice President for Policy and Planning of the American Gas Association.
“The fact that a diverse Task Force like this could reach a consensus on these particular findings and recommendations was unexpected,” said Task Force co-Chair Gregory C. Staple, CEO of ACSF. “This consensus suggests that, although we may have a stalemate on many other energy issues, there is at least one important area – natural gas – where progress is within reach,” Staple added.
Background
Interest has grown recently in natural gas as a cleaner, low-carbon, low-cost alternative to other fossil fuels in the electric power and industrial sectors. For example, in his State of the Union address, President Obama called for a federal clean energy standard for generating electricity that could be partly satisfied by using more domestic natural gas.
The Task Force was jointly convened by the BPC and ACSF in March 2010 to examine historic causes of instability in natural gas markets and to explore potential remedies. Task Force members, listed below, represent natural gas producers and distributors, consumer groups and large industrial users, as well as independent experts, state regulatory commissions and environmental groups.
Key Task Force Findings and Recommendations:
1. Recent developments allowing for the economic extraction of natural gas from shale formations reduce the susceptibility of gas markets to price instability and provide an opportunity to expand the efficient use of natural gas in the United States.
2. Government policy at the federal, state and municipal level should encourage and facilitate the development of domestic natural gas resources, subject to appropriate environmental safeguards. Balanced fiscal and regulatory policies will enable an increased supply of natural gas to be brought to market at more stable prices. Conversely, policies that discourage the development of domestic natural gas resources, that discourage demand, or that drive or mandate inelastic demand will disrupt the supply-demand balance, with adverse effects on the stability of natural gas prices and investment decisions by energy-intensive manufacturers.
3. The efficient use of natural gas has the potential to reduce harmful air emissions, improve energy security, and increase operating rates and levels of capital investment in energy intensive industries.
4. Public and private policy makers should remove barriers to using a diverse portfolio of natural gas contracting structures and hedging options. Long-term contracts and hedging programs are valuable tools to manage natural gas price risk. Policies, including tax measures and accounting rules, that unnecessarily restrict the use or raise the costs of these risk management tools should be avoided.
5. The National Association of Regulatory Utility Commissioners (NARUC) should consider the merits of diversified natural gas portfolios, including hedging and longer-term natural gas contracts, building on its 2005 resolution. Specifically, NARUC should examine:
- Whether the current focus on shorter-term contracts, first-of-the-month pricing provisions and spot market prices supports the goal of enhancing price stability for end users,
- The pros and cons of long-term contracts for regulators, regulated utilities and their customers,
- The regulatory risk issues associated with long-term contracts and the issues of utility commission pre-approval of long-term contracts and the look-back risk for regulated entities, and
- State practices that limit or encourage long-term contracting.
6. As the Commodity Futures Trading Commission (CFTC) implements financial reform legislation, including specifically Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Pub. L. 111-203), the CFTC should preserve the ability of natural gas end users to cost effectively utilize the derivatives markets to manage their commercial risk exposure. In addition, the CFTC should consider the potential impact of any new rulemaking on liquidity in the natural gas derivatives market, as reduced liquidity could have an adverse affect on natural gas price stability.
7. Policy makers should recognize the important role of natural gas pipeline and storage infrastructure and existing import infrastructure in promoting stable gas prices. Policies to support the development of a fully functional and safe gas transmission and storage infrastructure both now and in the future, including streamlined regulatory approval and options for market-based rates for new storage in the United States, should be continued.
Complete copies of the Task Force report along with a library of original commissioned research can be found here and here.
Sponsoring Task Force Members:
Gregory C. Staple
Task Force Co-Chair
Chief Executive Officer
American Clean Skies Foundation
Norm Szydlowski
Task Force Co-Chair
Bipartisan Policy Center;
President & CEO
SemGroup Corporation
Ken Bromfield
U.S. Commercial Director, Energy Business
The Dow Chemical Company
Carlton Buford
Lead Economist
The Williams Companies
Peter Sheffield
Vice President, Energy Policy and Government Affairs
Spectra Energy Corporation
Ralph Cavanagh
Senior Attorney and Co-Director, Energy Program
Natural Resources Defense Council
Paula Gant
Senior Vice President for Policy and Planning
American Gas Association and on behalf of the American Gas Foundation
Carl Haga
Director, Gas Services
Southern Company
Byron Harris
Director
West Virginia Consumer Advocate Division
Marianne Kah
Chief Economist, Planning and Strategy
ConocoPhillips
Todd Strauss
Senior Director, Energy Policy, Planning and Analysis
Pacific Gas & Electric Company
Additional Task Force Members:
Colette Honorable
Chairman
Arkansas Public Service Commission
Sharon Nelson
Former Chair, Board of Directors
Consumers Union
Sue Tierney
Managing Principal
Analysis Group, Inc.;
Former Assistant Secretary of Energy
Bill Wince
Vice President, Transportation and Business Development
Chesapeake Energy Marketing
Marty Zimmerman
Professor
Ross School of Business, University of Michigan;
Former Group Vice President, Corporate Affairs,
Ford Motor Company
About the American Clean Skies Foundation
The American Clean Skies Foundation, a Washington-based nonprofit, supports energy independence and a clean, low-carbon environment through expanded use of natural gas, renewables and efficiency. For more information, visit www.cleanskies.org.
About the Bipartisan Policy Center
The Bipartisan Policy Center (BPC) is a non-profit organization that was established in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell to develop and promote solutions that can attract public support and political momentum in order to achieve real progress. The BPC acts as an incubator for policy efforts that engage top political figures, advocates, academics and business leaders in the art of principled compromise. For more information, please visit our website.
Natural gas costs unlikely to remain low through 2011
January 24, 2011
David Parkinson – Globe and Mail Update Dec. 31, 2010 5:41PM EST
When Arthur Berman argues that natural gas is destined to have better prices in 2011 than it had in a mediocre 2010, he isn’t talking about technical price charts, or historical correlations, or relative valuations, or even supply-and-demand balances.
No, his view is more down to earth. He’s talking about geology.
“I’m a working petroleum geologist, I’m not a financial analyst,” said Mr. Berman, a prominent Houston-based energy consultant whose controversial views on the North American shale-gas phenomenon have raised eyebrows in the industry. “We probably have a lot less natural gas resource than is commonly believed. “So, what I see is that natural gas prices will not remain depressed. I’m not a price forecaster, but I have every reason to believe that a long position in natural gas [investing] is a smart position.”
The natural gas pricing story has been all about shale gas in 2010, and its fate in 2011 is closely tied to this big wild card, too. Thanks to advances in drilling technology for extracting gas from seams in shale rock, there has been a rapid expansion of drilling in shale plays that were once considered impossible to economically exploit. The resulting boom in production has unleashed substantial new supplies on the North American marketplace, outstripping demand and bloating inventories. Volumes of gas in U.S. storage facilities swelled to record levels last month – 40 per cent higher than they were 10 years ago, almost 20 per cent higher than five years ago – even as gas consumption has rebounded to near pre-recession levels.
That kept natural gas prices low and in decline for most of 2010. Even with the high-demand winter season approaching, prices struggled to stay above $4 (U.S.) per million British thermal units on the New York Mercantile Exchange well into December – their weakest December prices in nearly a decade.
The majority of industry analysts believe the shale-gas boom will continue to keep supplies well above consumption levels in 2011, weighing down natural gas prices. “The fundamentals of oversupply are not likely to change in 2011,” said Peter Tertzakian, chief energy economist at ARC Financial Corp. in Calgary. “Since we expect U.S. natural gas demand growth to come to almost a standstill in 2011 and supply growth to stay in positive territory, the inventory glut remains a concern,” said analyst Dominic Schnider of UBS AG in a recent research note.
But a vocal minority – led by the likes of Mr. Berman and renowned long-time oil and gas forecaster Henry Groppe – believe shale gas may be a bubble that could begin to burst in 2011. They are concerned with both the extremely rapid rates at which production from new shale-gas wells drops off, and the high costs of development and production that suggest to them that producers won’t be willing to keep up the high pace of drilling in shale plays at these unprofitable prices much longer. “[Shale] is a great new resource. I don’t dispute for a moment the size of the resource or its importance,” said Mr. Berman, who, like Mr. Groppe, serves as a consultant to Toronto-based fund management company Middlefield Capital Corp. “What I question is, ultimately, what it will cost to produce the resource.” Mr. Berman’s analysis tells him that North American shale-gas reserves have been exaggerated; that “more than half of the commercial reserves are produced in the first year” of each well; and that the full costs for producing shale gas work out to about $7 per million BTU – far above the current selling price.
He believes companies have been encouraged to aggressively drill U.S. shale plays due to regulations requiring producers to either initiate drilling on their properties or lose them – they want to secure the land. But that won’t continue through 2011, he said. “As I listen to the comments of the executives of the companies that are most active in the shale plays in the U.S., they’re all saying that they’re going to continue to hold the land through the first half of 2011, and then you’re going to see a big decrease in [drilling] rig count,” Mr. Berman said. “They’re smart people; they’re not going to continue to do this beyond the time that they have to.” Instead, he said, companies will redirect their drilling rigs to oil properties, where the cost-to-price equation is much more profitable. That will slow natural gas volumes and change market perception of shale’s potential, he said – and that will push up prices. “It would not surprise me to see the end of 2011 start to see a notable recovery of price,” he said.
Mr. Tertzakian acknowledges that natural gas prices must eventually revert to at least high enough to cover “the marginal costs of producing natural gas in North America,” which he pegs at the $5 to $6 range. However, he doesn’t see that happening in 2011 – and he doesn’t envision a major drop-off in shale drilling or a serious hit to supplies over the next year. “There’s no shortage of gas in the ground. We can debate the technical nuances, but at the end of the day, it takes a certain amount of money to exploit these things – the only restriction is the availability of capital.” He expects some slowdown in natural-gas rig count in the second half of next year could moderate supplies, but that won’t do much to make up for what should continue to be a weak market in the first half – making for another year of 2010-like prices.
“Prices in 2011 will be similar to 2010,” agreed Bill Gwozd, vice-president of gas services at Calgary energy consulting and analysis firm Ziff Energy Group. “That’s not a healthy price for producers – but it’s quite nice for consumers.”
Big Oil Companies Move Toward Natural Gas
December 29, 2010
CHRIS KAHN | 11/ 9/10 06:06 PM | 
NEW YORK — Pretty soon, Big Oil will be more like Big Gas.
The major oil companies are increasingly betting their futures on natural gas, with older oil fields producing less crude and newer ones either hard to reach or controlled by unfriendly nations.
They are focusing more than ever on natural gas because it burns cleaner than oil and is gaining traction as a fuel for transportation. The latest move came Tuesday, when Chevron made a $4.3 billion deal to buy up natural gas fields in the Northeast.
Earlier this year, Exxon Mobil bought XTO Energy to become America’s largest producer of natural gas. And Royal Dutch Shell expects natural gas to make up half its total global production in two years.
“If you look at most of the big developments now, they’re not about oil, it’s gas,” said Oppenheimer & Co. analyst Fadel Gheit.
The world will continue to run on crude oil for years to come, but even with new discoveries, oil production is expected to flatten out during the next few decades, according to the latest estimates from the International Energy Association.
Far down the road, Gheit believes, Exxon and Shell will lead the energy industry into a new era where oil companies devote most of their efforts to producing natural gas. The Energy Information Administration expects worldwide natural gas production to increase 46 percent from 2007 to 2035, compared with a 30 percent increase in world production of crude and natural gas liquids.
Gas is becoming more attractive to the oil companies because it’s more accessible. While OPEC controls most of the world’s oil reserves, it controls less than half of the natural gas reserves.
In the United States and Europe, natural gas is primarily used to heat homes. About three in five American homes use it for heat. And more and more power plants are using it to generate power. Natural gas is used to generate 23 percent of electricity in the U.S., up from 16 percent a decade ago.
Natural gas is used in small amounts for transportation in the U.S., mostly for city buses and garbage trucks. The oil industry is pressing Congress to add financial incentives for trucking and freight companies to convert their fleets.
Until recently, Big Oil watched the rise of U.S. natural gas from the sidelines, and smaller companies drilled into underground layers of shale. New techniques allowed companies to drill parallel to the ground and hit previously tough-to-reach deposits, helping them tap ever larger bounties of shale gas.
Production costs fell. Drilling rigs started popping up along America’s shale-rich regions in Appalachia, Texas and North Dakota. Experts now say the U.S. is sitting on enough natural gas to last the country for the next century.
This year, Big Oil jumped in. Exxon bought XTO for more than $30 billion, immediately making it America’s largest natural gas producer. XTO so far has helped Exxon increase its natural gas production by 50 percent.
Then Shell agreed to buy East Resources Inc. for $4.7 billion, and China’s state-owned offshore oil and gas company, CNOOC Ltd., invested $2.16 billion in oil and gas fields owned by Chesapeake Energy.
Production jumped to 1.94 trillion cubic feet in August, the highest monthly total since January 1973, according to available government data.
“Production is screaming,” said E. Russell Braziel, managing director of BENTEK Energy, which tracks natural gas prices in the U.S.
The U.S. now holds about 3.82 trillion cubic feet of natural gas in storage, about 10 percent more than the average over the past five years. And the industry keeps pumping more out of the ground.
There are challenges. The same low prices that make the assets affordable have caused some companies, namely ConocoPhillips, to pull back on production. Natural gas has dropped about 24 percent this year.
And people near shale rigs complained that groundwater supplies were contaminated by the industrial chemicals used in the drilling process. The Environmental Protection Agency is studying the possible effects on drinking water and the public health.
Still, most of the big companies continue to press ahead with multibillion-dollar acquisitions.
“When the market is weak, that’s when it’s time to act,” Argus Research analyst Phil Weiss said.
What is shale gas and why is it important?
December 17, 2010
As reported by 
Shale gas refers to natural gas that is trapped within shale formations. Shales are fine-grained sedimentary rocks that can be rich sources of petroleum and natural gas. Over the past decade, the combination of horizontal drilling and hydraulic fracturing has allowed access to large volumes of shale gas that were previously uneconomical to produce. The production of natural gas from shale formations has rejuvenated the natural gas industry in the United States.
Did You Know?
Sedimentary rocks are rocks formed by the accumulation of sediments at the Earth’s surface and within bodies of water. Common sedimentary rocks include sandstone, limestone, and shale.
Did You Know?
Shale gas in 2009 made up 14% of total U.S. natural gas supply. Production of shale gas is expected to continue to increase, and constitute 45% of U.S. total natural gas supply in 2035, as projected in the EIA Annual Energy Outlook 2011.
Does the U.S. Have Abundant Shale Gas Resources?
Of the natural gas consumed in the United States in 2009, 87% was produced domestically; thus, the supply of natural gas is not as dependent on foreign producers as is the supply of crude oil, and the delivery system is less subject to interruption. The availability of large quantities of shale gas will further allow the United States to consume a predominantly domestic supply of gas.
According to the EIA Annual Energy Outlook 2011, the United States possesses 2,552 trillion cubic feet (Tcf) of potential natural gas resources. Natural gas from shale resources, considered uneconomical just a few years ago, accounts for 827 Tcf of this resource estimate, more than double the estimate published last year. At the 2009 rate of U.S. consumption (about 22.8 Tcf per year), 2,552 Tcf of natural gas is enough to supply approximately 110 years of use. Shale gas resource and production estimates increased significantly between the 2010 and 2011 Outlook reports and are likely to increase further in the future.
Where is Shale Gas Found?
Shale gas is found in shale “plays,” which are shale formations containing significant accumulations of natural gas and which share similar geologic and geographic properties. A decade of production has come from the Barnett Shale play in Texas. Experience and information gained from developing the Barnett Shale have improved the efficiency of shale gas development around the country. Another important play is the Marcellus Shale in the eastern United States. Surveyors and geologists identify suitable well locations in areas with potential for economical gas production by using both surface-level observation techniques and computer-generated maps of the subsurface.
Source: U.S. Shale Plays Map, http://www.eia.doe.gov/oil_gas/rpd/shale_gas.pdf
How is Shale Gas Produced?
Two major drilling techniques are used to produce shale gas. Horizontal drilling is used to provide greater access to the gas trapped deep in the producing formation. First, a vertical well is drilled to the targeted rock formation. At the desired depth, the drill bit is turned to bore a well that stretches through the reservoir horizontally, exposing the well to more of the producing shale.
Hydraulic fracturing (commonly called “fracking” or “hydrofracking”) is a technique in which water, chemicals, and sand are pumped into the well to unlock the hydrocarbons trapped in shale formations by opening cracks (fractures) in the rock and allowing natural gas to flow from the shale into the well. When used in conjunction with horizontal drilling, hydraulic fracturing enables gas producers to extract shale gas at reasonable cost. Without these techniques, natural gas does not flow to the well rapidly, and commercial quantities cannot be produced from shale.
Schematic Geology of Natural Gas Resources
Source: modified from U.S. Geological Survey Fact Sheet 0113-01.
How is Shale Gas Production Different from Conventional Gas Production?
Conventional gas reservoirs are created when natural gas migrates toward the Earth’s surface from an organic-rich source formation into highly permeable reservoir rock, where it is trapped by an overlying layer of impermeable rock. In contrast, shale gas resources form within the organic-rich shale source rock. The low permeability of the shale greatly inhibits the gas from migrating to more permeable reservoir rocks. Without horizontal drilling and hydraulic fracturing, shale gas production would not be economically feasible because the natural gas would not flow from the formation at high enough rates to justify the cost of drilling.
Diagram of a Typical Hydraulic Fracturing Operation
Source: ProPublica, http://www.propublica.org/special/hydraulic-fracturing-national
What Are the Environmental Issues Associated with Shale Gas?
Natural gas is cleaner-burning than coal or oil. The combustion of natural gas emits significantly lower levels of key pollutants, including carbon dioxide (CO2), nitrogen oxides, and sulfur dioxide, than does the combustion of coal or oil. When used in efficient combined-cycle power plants, natural gas combustion can emit less than half as much CO2 as coal combustion, per unit of energy released.
However, there are some potential environmental issues that are also associated with the production of shale gas. Shale gas drilling has significant water supply issues. The drilling and fracturing of wells requires large amounts of water. In some areas of the country, significant use of water for shale gas production may affect the availability of water for other uses, and can affect aquatic habitats.
Drilling and fracturing also produce large amounts of wastewater, which may contain dissolved chemicals and other contaminants that require treatment before disposal or reuse. Because of the quantities of water used, and the complexities inherent in treating some of the chemicals used, wastewater treatment and disposal is an important and challenging issue. If mismanaged, the hydraulic fracturing fluid can be released by spills, leaks, or various other exposure pathways. The use of potentially hazardous chemicals in the fracturing fluid means that any release of this fluid can result in the contamination of surrounding areas, including sources of drinking water, and can negatively impact natural habitats.
Who Hit the Switch?
December 9, 2010
We have been lucky over the pas t few years. We have been blessed with warmer than usual winter temperatures. I know; last year we had some major snowstorms but overall the winter temperatures have been warmer.
Over the last year we have seen the natural gas market prices react to these warmer temperatures. Storage numbers have been at a 5-year high and prices have continued to drop to their lowest sustaining level in the last 3 to 4 years.
Speaking with many energy analysts, they feel we may have hit the bottom and prices will slowly start inching up.
Inching up may be an understatement? Just in the last week, prices jumped over 10%. Hit with the sudden cold front the market took off.
The cost of buying natural gas on the open market is made up of 2 factors. Nymex (gas out of the ground to the banks of Louisiana) and Basis (the transportation cost for getting natural gas delivered to your local provider). These 2 factors combined give us the Index. This is the total wholesale cost to buy natural gas on the open market.
The last couple of weeks have seen the market in a holding pattern. Nymex prices were under $4.00 a decatherm ($.40 cents a therm) and it was a wait and see scenario. Should we have seen continued mild temperatures the market would have remained stable.
With the sudden switch to cold temperatures and forecast for a continued cold snap; the market did not inch up but leapt. Nymex prices open today, as of this writing, at $4.61 a decatherm. Measure this against the low opening on 10/25/10 of $3.29 a decatherm.
Prices are still low compared to where they were 2 to 3 years ago. In 2008, natural gas prices hit a high of $14 to $16 a decatherm ($1.40 to $1.60 a therm). Just last year (2009) we were looking at the average price to compare of around $10.00 a decathem ($1.00 a therm). We are now seeing fixed price positions in the low to mid $6.00 a decatherm range.
Each account is unique and priced individually, for pricing is based on demand factors. Many clients are seasonal clients and their biggest usage comes from heating their locations during the winter. Their natural gas prices would be higher than a client having a more even demand factor, for they use natural gas throughout the year (a restaurant would be a good example).
Some clients have benefited by floating the market, taking advantage of the falling prices over the last couple of years. Now may be the time to begin a discussion and review your options. There is more upside risk (chance of prices raising higher) than there is downside risk (market prices have been at a 4 year low).
You can lock the price going forward for a 1 or 2-year period, which will provide an overall savings from the average prices you have been paying over the last year or at the minimum, lock the winter month which will provide price certainty.
Should you feel this is only a temporary rise in market prices, you may choose to float the market and look for a continued flatness in pricing.
One other option to consider, should the float scenario be of interest, would be to lock the basis (transportation cost) and continue to float the nymex. Several of our clients have found success with this option in the past. This position is normally taken when they see the Nymex as being too high and feel the market will be dropping over time. In the past, if we saw basis price fall under $2.00 this was considered to be a good deal. The current basis prices are well under $2.00.
Should you like to know more about your deregulated gas options email george@hbsadvantage.com or call 856-857-1230
Visit us on the web www.hutchinsonbusinesssolutions.com
I Think We Just Dodged a Bullet
October 5, 2010
I think we just dodged a bullet! Last week the meteorologists were having a field day tracking this massive storm that was supposed to hit the east coast. High winds, heavy rains. Normally, when we get a bye, the storm sweeps out into the ocean. This storm actually went inland, west of the I95 corridor. Sad to say, they did get substantial flooding.
Why am I talking about the weather, you may ask? Because this is my article, I can choose a topic. Seriously! … Because weather plays a very big part of monitoring natural gas commodity cost.
The current natural gas prices are still the lowest they have been in the last 4 years. September’s NY Index price (the price that providers buy gas) was $.39 cents a therm compare this to $1.41 in July 2008. Quite a difference! Why, you may ask?
First of all, natural gas storage levels continue to be at a 5 year high. Add to that, the shale natural gas that been found in western PA. They are saying this could provide natural gas to the US for the next 100 years.
It is the old supply and demand theory, until the market deems it appropriate to ignore.
For now, market activity show that this is a great time to be buying gas in the deregulated natural gas market. Remember, that since deregulation, the local providers are no longer in the supply business. Therefore they charge you a default rate, which in normally higher. They buy natural gas wholesale and bill their customers’ retail.
HBS puts our clients in a wholesale position. Our clients are finding saving from 10% upto 20+%, depending on who your local provider is.
Since 30% of the electric is generated from natural gas, it also plays an important influence to the current market electric prices. They are also at a 4-year low.
To qualify your commercial natural gas or electric bill should be a minimum of $3000 a month each. Many of our clients are finding substantial saving in the deregulated utility market.
Should you like to know more about savings in the deregulated natural gas and electric market email george@hbsadvantage.com or call 856-857-1230.
