Supply and demand balance reports issued by Bentek Energy LLC, an energy analyst based in Golden, Colo., have indicated in recent weeks a significant drop in North American natural gas production.
"Total US production declined 5% in a 1-week period, from 51 bcf on Jan. 10 to only 48.3 bcf on Jan. 17. This is the lowest production level indicated by our pipeline flow database since October 2005 when the Gulf Region was still recovering from [Hurricanes] Katrina and Rita," Bentek Energy reported Jan. 25.
"In the past week, production has recovered back to about 49 bcf as of Jan. 25. However, this level remains 2.6 bcf below the average production rate in January 2006."
Meanwhile, analysts at Friedman, Billings, Ramsey Group Inc. (FBR), Arlington, Va., said in a separate report that Canadian gas exports to the US are expected to decline by 4%, or 400 MMcfd in 2007, following a similar drop in 2006. "We expect exports to decline...as a result of reduced drilling outlook for 2007 and increasing oil sands consumption as existing projects ramp back up and new projects come on line," said FBR researchers.
The weather factor
Based on its canvass of various market participants, Bentek said weather was one of the factors contributing to the current steep decline in US production. Although media coverage has been unusually muted, Bentek analysts said individual operators reported sizeable shut-ins of gas wells because of sustained freezing temperatures, particularly in the Rockies region.
"Unusually large snowfalls have disrupted operations. In addition, there is an expected dip in production that occurs about this time each year due to environmental constraints on producing activities," said Bentek analysts. "The Gulf [of Mexico] region started to decline a few days before cold weather set in due to maintenance and operational curtailments on several pipeline systems."
The result is "a double-whammy" for the natural gas supply-demand balance: a huge increase in demand combined with a significant decrease in supply. "Since winter weather finally appeared 2 weeks ago, 352 bcf has been withdrawn from storage. The recent storage withdrawals have resulted in an abrupt shift in market expectations for end-of-season storage inventories. In early January, most market participants expected a large storage overhang to depress prices in the spring. The large storage withdrawals over the past 2 weeks have eased that expectation," analysts said. Bentek's latest weekly market study projected another large withdrawal—195 bcf—for the week ended Jan. 26.
Canadian drilling and completion activity is expected to drop 10-15% in 2007 as a result of higher drilling costs, lower crew productivity, lower and more volatile commodity prices, and widening market differentials. "The drop in fourth quarter 2006 drilling activity combined with less drilling activity outlook for 2007 will result in 2007 production declining by 300 MMcfd, according to our estimate. This compares [with] our previous estimate of flat production," said FBR analysts.
"The key demand growth in 2007 will be increasing natural gas consumption in the oil sands as existing projects ramp back up and new projects come on line. We estimate that this will increase gas consumption by another 100 MMcfd, in line with our previous estimate," they said.
Canadian gas exports declined an estimated 400 MMcfd in 2006, with 100 MMcfd accounted for by increased oil sands consumption. Canadian well completions totaled 15,362 in 2006 vs. 15,355 in 2005. However, gas completions dropped significantly in the fourth quarter, down 8% from the previous year's level. "The decreased gas well completion activity was mostly due to fewer shallow gas wells being drilled. The fourth quarter reduced completion activity will be felt in the next few months," FBR analysts said.
Despite volatile trading with seesawing prices, the benchmark US crudes contract climbed back above $55/bbl, jumping by $1.19 to $55.42/bbl Jan. 26 on the New York market, a 4% gain for the week as cold weather rallied heating oil demand in the Northeast.
The front month natural gas contract also climbed back above $7/MMbtu to $7.18/MMbtu as temperatures dropped to 9º F. Jan. 26 in New York City, the lowest level in 2 years.
Meanwhile, the FBR group forecast "a 10% decline in refined product inventories over the next 2 months." Analysts said, "Strong gasoline and diesel demand in the first few weeks of 2007, coupled with refinery maintenance and a negative Europe-US East Coast arbitrage spread (limiting imports), indicate that inventories could fall 10% over the next 2 months."
(Online Jan. 29, 2007; author's e-mail: email@example.com)