Pressure on domestic wholesale natural gas prices this winter heating season will mirror last year’s because producers have drilled more wells, and technology has helped them improve recovery rates, the Natural Gas Supply Association said in its annual forecast on Oct. 2.
“This winter season, we believe that all the combined market forces (slightly warmer than normal weather, stagnant economic growth, moderate growth in overall demand, near-record storage levels and a healthy supply) will cause flat price pressure on the gas market compared to last winter,” said NGSA Chairman Patrick J. Kuntz, who also is vice-president of gas and oil sales at Marathon Oil Co.
He said US gas production is expected to be nearly 8% higher this winter than a year earlier, based on an independent analysis by ICF International of Fairfax, Va., which NGSA commissioned. “Explorers and developers responded to the market signals, and companies are producing more domestic gas. Current production rates are at their highest level since the early to mid-1970s,” Kuntz told reporters at a briefing.
Technology also is playing a significant role, he continued. “Much of our increase in domestic gas production is coming from unconventional plays where technological advances have unlocked the resource. Horizontal drilling is another big advance that allows more gas to be produced from a single well,” he said.
NGSA forecasts that 31,530 wells will be completed during the 2008-09 heating season, 753 or 2.4% more than the 30,777 completions during the same period a year earlier. Average production is expected to climb 7.9% year-to-year to 57.5 bcfd from 53.3 bcfd, while the annual average rig count is expected to rise 4.4% to 1,535 from 1,470.
Less gas from Canada
The forecast also projects a 6.25% decline in US imports of Canadian gas to an average 7.5 bcfd from 8 bcfd during the 2007-08 winter heating season. “While we are expecting to import less, supplies from Canada continue to play an important role in supply during the winter heating season,” Kuntz said.
The combination of increased domestic gas production and higher global market prices for LNG suggests that the US could lose LNG volumes to countries willing to pay more this winter, he indicated. US LNG imports normally average 1-1.8 bcfd each winter, Kuntz said. NGSA’s forecast calls for a 25% year-to-year increase to 1 bcfd from 800 MMcfd.
“But the important takeaway is that rising US gas production and domestic supply is a direct and positive response to market signals, enabled by the advances in technology. This resulted in downward pressure on the gas market for the winter season,” Kuntz said.
He also warned that higher domestic onshore production, while encouraging, also involves unconventional gas. “It’s in its infancy. I don’t think it’s going to solve our problems. We’re going to have to rely on a variety of sources,” he said.
More gas from domestic offshore deposits will be needed because onshore unconventional supplies will be costly, Kuntz continued. “It could be a bigger part of the solution than we realize, but we shouldn’t foreclose other opportunities,” he said.
Different challenges
With much of this new onshore production occurring in regions with little previous experience, state government regulators and producers may encounter unexpected problems, Kuntz said. “I don’t think there’s nearly the gas gathering, treating, and other infrastructure that many people imagine. Disparate ownership and right-of-way questions also may make it difficult to get permits. There probably will be a different, but equal, set of challenges on the state level,” he said.
Climate and geography also may pose unexpected problems, Kuntz added. “There are more creeks that will need to be crossed. Many of those bridges have been in place for 70 years. A 2-ton rig may not always make it across,” he said.
NGSA expects gas storage going into the heating season to be 3,450 bcf, 98% of the 5-year average but 95 bcf or 2.7% lower than the record 3,545 bcf of storage entering the 2007-08 winter heating period. “This year, we understand that another 100 bcf of storage capacity is being built,” Kuntz said.
The forecast also calls for a 2.4% year-to-year increase in overall US winter heating season gas demand to an average 78.5 bcfd from 76.7 bcfd a year earlier. Kuntz said that Energy Ventures Analysis Inc. of Arlington, Va., predicts in its demand outlook prepared for NGSA that the most growth will occur in power generation, where it expects gas-fired generating capacity to grow 33% year-to-year to 6.9 Gw.
“If it weren’t for the slowing economy and evidence of commercial and residential conservation, our projections for overall demand could likely be higher. But as it stands, the 2.4% increase in demand doesn’t meet our threshold, and therefore our expectation is that pressure on prices will be flat,” he said.
