Market fundamentals may 'whipsaw' summer natural gas prices

Sam Fletcher
OGJ Online

HOUSTON, Apr. 20 -- Natural gas prices could soften below $4/Mcf over the next two months, but a sharp increase in demand in July-August could whipsaw prices above $5/Mcf again as new electric power plants come on stream through 2002, said industry executives Thursday at conference sponsored by the International Association of Drilling Contractors in Houston.

The new boom for the upstream natural gas industry "is going to last a long time. The market fundamentals are in place for at least 5 years, maybe more. But it's not going to be a smooth ride up," said Marshall Adkins, managing director of energy equity research in the Houston office of Raymond James & Associates Inc.

"This is the first time in history we've had such supply and demand fundamentals, since gas was really deregulated in 1992," said Craig Clark, executive vice president of US operations for Houston-based Apache Corp. "We've lost our storage cushion, which has resulted in more price volatility."

With a short-time surplus of natural gas at the moment, Adkins sees "a strong potential" for prices to fall below $4/Mcf over the next two months as the industry rebuilds storage inventories that were pulled down to record low levels over the winter.

However, he said, "As gas-fired power generators come on line in July and August, there will be a significant increase in demand, and we're just not going to have enough gas." The result will be a "whipsaw" in gas market prices, he said, "much more volatile than we've ever seen during any injection period." Over the long run, the new floor for natural gas prices will be around $5/Mcf, said Adkins.

Meanwhile, the gap is widening between growing US consumption of natural gas and declining production, despite the recent run up in commodity prices.

"We are seemingly in the best of times. The land rig count is up about 800 rigs in the last 19 months, most of them drilling for natural gas," said Robert Wilder, vice president of sales for Nabors Drilling USA Inc., Houston.

But while the number of rigs drilling for gas in the Lower 48 states and Canada has steadily increased for the past several years, except for the drop in 1997-1998, Wilder and other industry executives noted that natural gas production has not responded to the same degree.

The much-touted projections of US gas consumption increasing to 30 tcf by 2010 will be hindered by insufficient supply and slower deregulation of the electric industry in the wake of California's self-inflicted energy crisis, Clark said.

"Production has been flat since 1993. We will need about 1,000 rigs drilling for gas to increase production on a year-to-year basis," Clark said.

In addition to total supplies, the industry has to address the problems of peak load capacity. "We don't average the same amount of gas (delivered) each day. Right now, our peak day capacity for gas infrastructure is 100 bcfd," said Clark. "To get to 30 tcf, I can't imagine how big it would have to be to handle a peak day in winter or summer, probably about 150 bcfd. And that would require a lot more than just more gas wells being drilled�pipelines, storage and the rest."

He said, "The wake up time for our government's energy policy came long before now."

Contact Sam Fletcher at Samf@OGJonline.com