Natural Gas Prices: The Next Big Thing

June 8th, 2009 by

By Pat Hinds

In February I wrote a blog called, “Cheap Oil is Not Here to Stay: Time to Focus on Selling to the Energy Sector.” At that time the media was predicting $30.00 per BOE; since then we have seen oil rise rapidly to $60 plus per BOE. The focus in the North American energy sector is on the price recovery of natural gas with a price less than $4.00 per BTU natural gas; seemingly, the price can only go up. The US government’s Energy Information Administration reported Thursday that inventories rose to 124 billion cubic feet to 2.3 trillion cubic feet – that is 22% over the 5 year average. This appears to be a huge number and would make some people question the recovery of natural gas prices, but you have to keep in mind the supply of low cost natural gas is not unlimited; when the low cost gas in storage is gone it will be replaced with gas that costs significantly more.

The natural gas industry is going through a major change; low cost conventional natural gas discovery is over in North America. In a recent article in the Calgary Herald called, Ziff calls for shutting in gas to revive market, Bill Gwozd estimates, “the cost of new gas production is in the order of $9.” If you question the validity of the estimate, take a look at the North American count that will bottom out this summer at the lowest rate in 10 years. The reason for the rapid decline makes it challenging to want to explore for a resource that costs $9 when you can only sell the commodity for $4.00.

The unconventional natural gas discovery that cost $9 to produce includes tight gas, shale gas and coal bed methane. All of these methods include a process called fracturing which is now under scrutiny by the US Government, as it is feared the fracturing process has a negative impact on the drinking water supply. In the Calgary Herald article, U.S. Push to regulate fracturing could temper interest in shale, Richard Ranger predicts, “new requirements could cost as much as $100,000 US per well.” This will have a major impact on economics of a technology that is costing $9 to produce.

It is my prediction the price of natural gas will have a rapid rise prior to the end of 2009, similar to what we have seen in the price of oil.

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