Oil price surge to continue in 2011, while natural gas prices remain flat
An Eagle Ford shale well at dawn.Photo courtesy of Swift Energy.
Most petroleum industry forecasters seem a bit uncertain about the near-term outlook for oil and gas, but the consensus seems to be that demand will strengthen in 2011 but not enough to deplete surpluses and raise prices, particularly with natural gas. Crude oil prices have been increasing steadily over the past year. However, natural gas prices remain in a deep rut due to plentiful supplies created by increased production from North American shale plays.
In its annual Forecast and Review issue dated Jan. 3, Oil & Gas Journal's editors predict that US and global energy demand growth rates will slow somewhat in 2011 due in part to persistently high unemployment. Obviously, if the economy strengthens and more workers find jobs, energy demand would increase accordingly.
Energy demand is expected to increase only 1% in 2011 compared with preliminary data that indicates a 3% increase in energy consumption last year, according to OGJ's Marilyn Radler, senior editor-economics, and Laura Bell, statistics editor.
They say that demand for oil, nuclear energy, hydroelectric power, and other renewable forms of energy will be up in the coming year, while demand for natural gas will inch up slowly and coal demand remains flat.
Even if the economy were to stage a remarkable recovery in 2011, it is likely that strong prices will keep oil demand down. The primary use for refined oil is as transportation fuels, and vehicle owners tend to drive less when they see abrupt price spikes.
Some analysts are predicting $4.00 gasoline prices at the pump if oil again approaches or exceeds the $100/bbl mark. John Hofmeister, the former president of Shell who currently heads a grassroots organization, Citizens for Affordable Energy, says Americans could be paying $5.00 a gallon for gasoline by 2012. Other industry experts say $5.00 gasoline is likely in the next decade, but probably not in the next year or two.
$5.00 retail gasoline would mean oil prices in the neighborhood of $150 to $180 a barrel, which most industry analysts don't predict until at least 2015, but it is interesting to note that these predictions are not coming from peak oil forecasters. They are coming from mainstream experts who see demand tightening markedly with respect to supplies in the next few years.
Natural gas forecast
The story is a little different for natural gas. On Jan. 3, Raymond James & Associates cut its US natural gas price forecast, citing persistent supply growth and limited access to capital for producers.
The bank lowered its 2011 estimate to $3.75 per thousand cubic feet from $4.25 previously, and cut its estimate for 2012 to $4.25 from $4.75.
"Unfortunately for energy companies, this supply problem may be around for a while," Houston-based Raymond James analysts J. Marshall Adkins, John Freeman, and Darren Horowitz said in a note to clients. "We expect that the US will remain structurally oversupplied with gas until we see a step-change upward in demand."
Gas prices tumbled 21% in 2010 as output from shale formations climbed. US marketed gas production rose to 1.945 trillion cubic feet in October, the highest level since 1973, according to the US Department of Energy.
Roughly 15% to 20% of US natural gas drilling will be driven by funding from joint-venture partners, Raymond James said. India's Reliance Industries, for example, agreed last June to acquire a $1.3 billion stake in a shale-gas venture led by Pioneer Natural Resources Company.
About 40% of gas drilling in 2011 will be in areas rich in natural-gas liquids, such as ethane and propane, Raymond James said. This enables producers in some shale plays, such as the Eagle Ford in Texas and the Marcellus in the northeastern US, to earn more than they would from natural gas sales, so long as gas prices remain below $4 per thousand cubic feet.
Demand for natural gas from power generators and industrial consumers will continue to rise in 2011, but not enough to offset higher supplies, said the Raymond James analysts.
EIA forecast
The Energy Information Administration expects the price of West Texas Intermediate crude oil to average about $93 per barrel in 2011, $14 higher than the average price last year. For 2012, the EIA says WTI prices will rise to $99 per barrel by the fourth quarter. This is based on the assumption that US real gross domestic product grows 2.2% in 2011 and 2.9% in 2012, while world real GDP (weighted by oil consumption) grows by 3.3% in 2011 and 3.7% in 2012.
Natural gas working inventories ended 2010 at 3.1 trillion cubic feet, about 1% below 2009's record-setting Dec. 31 level. Inventories are expected to remain at or near record highs through most of 2011, keeping prices depressed.
The EIA says the projected Henry Hub natural gas spot price will average $4.02 per MMbtu for 2011, $0.37 lower than the 2010 average. The agency says it expects the natural gas market to begin to tighten in 2012, with the Henry Hub spot price increasing to an average of $4.50 per MMbtu.
Wood Mackenzie upstream insight
Scotland-based Wood Mackenzie estimates that upstream spending in 2010 amounted to about $380 billion. This is about $19 billion higher than 2009, but still about 105 below the historical peak in 2008.
Investment plans have recovered "spectacularly" in the US, says the firm, due mainly to the boom in unconventional gas and liquids-rich plays. Overseas, giant capital projects in other major producing provinces, such as Angola and Australia, are also pursuing aggressive schedules.
Wood Mackenzie's experts believe the recovery will continue through the next three years. Upstream spending in the US is expected to climb from a low point of $63 billion in 2009, to around $95 billion in 2013. Still more spectacular growth is planned in Australia (up 190%) and Iraq (up 1,700%). Even more mature provinces such as the UK are anticipating a resurgence in investment, potentially to higher levels than before the economic crisis.
However, the recovery is not evenly reflected across the globe. Capital spending in Canada fell by 30% in 2009 and may not return to the peak levels of 2008 within the next five, or even ten, years, says the consulting firm. Upstream investment in Russia remains almost 20% below the 2008 total.
More than half of future upstream investment will be provided by the multi-national majors and a group of prominent national oil companies. PetroChina has by far the largest upstream commitment among the NOCs, and its spending plans rank with the largest of the majors. It has pursued an international expansion strategy over the past 10 years, but still spends only 5% of its upstream budget on overseas projects.
Two other Chinese oil companies, CNOOC and Sinopec, have recently acquired large stakes in South American oil and gas assets. In March 2010, CNOOC paid $3.1 billion to acquire half of Bridas Energy Holdings, an Argentine company. In November, CNOOC and Bridas acquired Pan American Energy, a private company with assets in South America, for just over $7 billion. China Petroleum Corporation (Sinopec) acquired Occidental Petroleum's Argentine assets for around $2.5 billion on Dec. 10. All this seems to indicate a shift in China's emphasis from Africa to Latin America.
Conclusion
An informal poll by Oil & Gas Financial Journal recently asked what will happen to upstream capital spending in 2011. Most responders, just over 50%, said spending will be robust for the next several years, possibly approaching the peak levels of early 2008. Another 21% said capex spending would increase by at least 5% but would not reach 2008 levels. This is another sign that industry people are increasingly optimistic about the economy and the petroleum sector in particular.
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