US natural gas market dynamics are getting to be almost as complicated as those for oil.
All that is lacking are a dominant producing group calibrating supply to support prices and some messy geopolitics.
For years, US gas markets had been pretty much a mundane supply-demand business, with demand dominated by the weather and supply by Lower 48 producers nervously watching winter weather forecasts to determine whether they overcommitted on drilling programs.
Those were the good old days.
US gas markets are no longer so simple. Weather still is a critical factor, but there are now countervailing forces. High gas prices can erase huge chunks of industrial demand from the market. Even the weather has become more of a complicating factor, with the surge in US gas-fired power capacity making summer temperaturesand competing nuclear and hydro power levelscompete with the chills of winter for market-watchers' attention.
Similarly, supply is no longer merely a slave of the rig count. Gas storage established its crucial market swing role a few years ago. And even the rig count must run at a more fevered pace than ever before just to keep production from collapsing, in these days of ultraefficient depletion.
And now we have the further complication of growth in LNG imports, which will become the 800 lb gorilla in the market before the end of the decade.
As if that weren't enough, capital spending and drilling strategies now are buffeted by new corporate concerns over reserve accounting practices, as well as by rising production costs.
The important thing to remember is that most of these complicating factors add upward pressure to US gas prices for the near to middle term. Yet these factors also encompass hidden paradoxes that make the long-term outlooksay, the turn of the decadea clouded view indeed.
Another strong year of LNG imports into the US will partially offset the price pressures caused by rising production costs, says Wakefield, Mass.-based Energy Security Analysis Inc.
ESAI expects US LNG imports to top 700 bcf in 2004 vs. 500 bcf in 2003which in turn was double 2002 levels. This would "move LNG to the margin, serving more than 3.5% of this year's total demand," ESAI said. With landed LNG costs coming in at $2.50-2.75/MMbtu, domestic producers face a tough new competitor. At the same time, US production costs are likely to rise 2-3%/quarter the rest of the year, ESAI reckons.
To make matters worse, reserve accounting practices have been called into question by the Securities and Exchange Commission, ESAI analyst Scott DePasquale notes: "It remains a very likely possibility that another scandal, impacting major oil and gas companies, could bring further uncertainty and volatility to North American natural gas markets this summer."
Gas storage is likely to end the heating season at a comfortable level near 1 tcf, as warmer weather appears to be the end-of-season trend. That usually would presage a slump in prices. But after adjusting for weather, working gas storage levels suggest a tightening of the supply-demand balance since January, owing to distillate prices exceeding those for gas and a return of as much as 1.7 bcfd of industrial gas demand vs. last year, says Ron Denhardt, vice-president, natural gas services, Strategic Energy & Economic Research Inc., Winchester, Mass.
One would think a gas rig count near 1,000 would mean a rerun of the late 1990s, when overcompensating producers would see their response to high gas prices cause a price slump. Not so this time around, according to Merril Lynch analyst John P. Herrlin Jr. He notes that the majors have lost significant US gas productive capacity, down to 22% today from 35% in 1990, due to reduced reinvestment, asset sales, and redeployment of capital abroad. Now the majors talk LNG. In addition, he says that production growth has moderated, due in part to concerns over the booking of proved undeveloped reserves, a lack of producing asset turnover with upside potential, graying of the workforce, and a lack of exploration leads. Meanwhile, wellhead and unit operating costs are rising.
"The new paradigms are more price volatility and higher operating margins for a greater period of time than once assumed, even with more drilling," Herrlin said.
Producers, pipelines, and buyers may weep, gnash their teeth, and rend their garments in despair at all this bewildering complication.
But the adrenalin junkies among market-watchers are rubbing their hands with glee.
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