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Source:  http://www.testosteronepit.com/home/2012/7/30/the-coming-unholy-all...

The Coming Unholy Alliance in Natural Gas

                        Monday, July 30, 2012 at 6:39PM

Natural gas traded at $3.22 per million Btu (MMBtu) at the Henry Hub on Monday, a seven-month high, and a jump of 69% from its April low. Breathtaking when you think that a few months ago, the doom-and-gloomers, who’d been right for a very long time, were predicting chillingly that the price would hit zero by the fall, when storage would be full and excess production would have to be flared. But the pains for the industry are far from over.

Natural gas spot prices can spike locally due to transportation constrains and demand conditions. Earlier this year, while Japan paid $17/MMBtu, New York $12/MMBtu, and Boston $9/MMBtu, prices at the Henry Hub, which is in southern Louisiana, marched towards their decade low and dropped below $2/MMBtu [for that phenomenon, read.... The Natural Gas Massacre And The Price Spike].

Conversely, there are regions in the US where natural gas prices lag behind those at the Henry Hub. A salient example is the daily spot price at the Tennessee Gas Pipeline (TGP) Zone 4 Marcellus, a hub that serves part of the vast Marcellus formation that extends across much of Virginia, Ohio, Pennsylvania, and New York.

Drilling by horizontal fracking has been phenomenally successful in this shale formation. In Pennsylvania, production of dry natural gas in June has doubled over last year, reaching 5.7 billion cubic feet per day—9% of overall US production. But it outstripped the take-away pipeline capacity, despite new pipelines that entered service in 2011 and added 1.5 Bcf/d in capacity. As a consequence, according to Bentek Energy, over 1,000 natural gas wells in northern Pennsylvania are not yet producing natural gas because of pipeline constraints.

With production outrunning pipeline capacity and creating a local glut, spot prices have separated from those at the Henry Hub. At the TGP Zone 4 Marcellus, starting in May, prices fluctuated widely and dipped below $1/MMBtu even has prices at the Henry Hub had started their track towards $3 MMBtu.

Producers in that region are hurting even more than elsewhere. The 1,000 wells that have been drilled but aren’t producing and cash-flowing yet are a drag on the companies that own them. And wells that are producing have had to sell their unhedged production at a discount to already depressed prices that remain below the cost of production in most of the nation. So the natural gas massacre hits northern Pennsylvania with even greater violence.

Rig count is a good indicator of the health of the drilling industry, and also of the direction of future production—though there is a considerable lag between the number of rigs drilling for gas and actual production of gas. And the rig-count is beginning to be worrisome. At 505 rigs as of July 27, the count is down 46% from October last year, and hit the lowest level since July 1999.

 

Somewhere between 700 and 900 rigs might be required to maintain current production levels, given the sharp decline rates of horizontally fracked wells (up to 90% over the first 12 to 18 months). These wells will then have to be refracked, or new wells will have to be drilled to make up for the declines—at an additional cost. An eternal rat race. But the hard-hit industry is stepping away from drilling for dry natural gas; drilling at today’s prices is still a losing proposition. Those that can have switched to drilling for oil and natural-gas liquids (priced similar to oil), which are profitable. Of the natural gas rigs in operation—fewer and fewer every week—an increasing number are focused on plays that contain more liquids and less dry natural gas. It’s how producers hope to survive.

Turmoil and financial stresses may further reduce drilling activities—though it seems unthinkable that the rig count could fall even further! Record demand is eating up the remnants of the glut. Supply appears to be leveling off and will eventually follow the rig count down. If that happens during heating season, when seasonal demand skyrockets, it will be an unholy alliance. We have seen violent spikes before. And we will see them again. It’s the nature of the business.

In the great natural gas shakeout, less efficient or poorly capitalized producers may get wiped out. It’s capitalism’s creative destruction. But the price of natural gas has been below the cost of production for so long that the damage is now huge. Read.... Natural Gas: Where Endless Money Went to Die.

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Replies to This Discussion

Permalink Reply by Jack Straw on August 9, 2012 at 3:41am

When it comes to a crystal ball to predict the future direction of natural gas prices, I look to the Weekly Natural Gas Storage Report produced by the Energy Information Agency – a branch of the Department of Energy. This report is released weekly at 10:30 AM on Thursdays (except when delayed by Federal Holidays).

Available at: http://ir.eia.gov/ngs/ngs.html

Please pay attention to the "red" line on the lower plot. The dreadful situation of March/April is quickly evaporating, as the gas in storage is now approaching historical norms.

Today’s (just released) report:

Working Gas in Underground Storage, Lower 48

Region Stocks in billion cubic feet (Bcf) Historical Comparisons
08/03/12 07/27/12 Change Year Ago (08/03/11) 5-Year (2007-2011) Average
Stocks (Bcf) % Change Stocks (Bcf) % Change
East
1,635
1,605
30
1,407
16.2
1,501
8.9
West
498
499
-1
402
23.9
417
19.4
Producing
1,108
1,113
-5
967
14.6
937
18.2
Total
3,241
3,217
24
2,776
16.8
2,855
13.5

Notes and Definitions

Beginning with the report   period for the week ending March 16, 2012, EIA is including salt dome

and nonsalt-dome subtotals for   the Producing Region in the Summary section.   

The sum of the components may   not equal the total for the Producing Region,

because of independent   rounding.

 


  Summary
Working gas in storage was 3,241 Bcf as of Friday, August 3, 2012, according   to EIA estimates.

This represents a net increase   of 24 Bcf from the previous week. Stocks were 465 Bcf higher

than last year at this time and   386 Bcf above the 5-year average of 2,855 Bcf. In the East Region,

stocks were 134 Bcf above the   5-year average following net injections of 30 Bcf. Stocks in the

Producing Region were 171 Bcf   above the 5-year average of 937 Bcf after a net withdrawal of

5 Bcf. Stocks in the West   Region were 81 Bcf above the 5-year average after a net drawdown of

1 Bcf. At 3,241 Bcf, total   working gas is above the 5-year historical range.

Working gas stocks in the   Producing Region, for the week ending August 03, 2012, totaled

1,108 Bcf, with 226 Bcf in salt   cavern facilities and 881 Bcf in nonsalt cavern facilities.

Working gas stocks decreased 8   Bcf in the salt cavern facilities and increased 1 Bcf in the

nonsalt cavern facilities since   July 27. An historical series of the salt and nonsalt subtotals

of the Producing Region is   available for download at: wngsr_producing_region_salt.xls.

 

 
Working Gas in Underground Storage Compared with 5-Year Range
 

Note:  The shaded area indicates the range between the historical minimum and maximum

values for the weekly series from 2007 through 2011.
Source: Form EIA-912, "Weekly Underground Natural Gas Storage Report."

The dashed vertical lines indicate current and year-ago weekly periods.

  

 

Permalink Reply by farmgas on August 9, 2012 at 5:45am

Jack...where do all the rigs go when removed from Pennsylvania and other dry gas areas?   The rig count seems to indicate that they aren`t simply moved to wet gas or oil areas.  Are they decommissioned until demand catches up again?

Permalink Reply by Jack Straw on August 9, 2012 at 7:36am

For a definitive response, you would need to hear from someone currently active in that end of the business and active in the region.

My guess is that many of those rigs active in the dry gas areas have moved to wet gas and oily areas.

Some rigs are moving West and South to other (oily) plays (Bakken, Eagleford, Mississippian).

Some inactive rigs are likely undergoing refurbishment - repairs and equipment upgrades to improve their efficiency and capabilities.

Some rigs are given a fresh coat of paint and "stacked", awaiting a client.

Some older rigs that were barely up to the task are being cannibalized for parts and the skeleton sent to China as scrap metal (soon to return as cheap shit at your local Walmart).

 

All IMHO,

                 JS

Permalink Reply by Jimmy Wilson on August 9, 2012 at 11:35pm

Jack Straw from Witchita,

 

Agree, however, in those 8 counties in Ohio , there is more Nattie than we can use in 100 lifetimes, hate to tell ya...the price spike is ands will be very short lived, you see Gulfport's Wagner 17 million and the rumored Antero was around 18-20 MILLION MCF and that is the second well in Monroe County...um, slight skew to the OL' supply and demand equation

Permalink Reply by Paul Martinelli on August 10, 2012 at 1:44am

Demand will also rise with supply......and don't forget, they control the supply valves and therefore somewhat the price.   NG will rise in price over next 3 years, not decline.

Permalink Reply by time will tell on August 10, 2012 at 3:25am

Nice job Jack !

Permalink Reply by Jack Straw on August 14, 2012 at 3:34pm

Some interesting statistics:

"it takes between 2,000 litres (500 gallons) and 5,000 litres (1250 gallons) of water to grow one kilogram (2.2#) of rice, 11,000 litres (2750 gallons) to grow the feed for enough cow for a quarter-pound hamburger, 50 cups of water for a teaspoon of sugar and 140 litres (35 gallons) of water to produce just one cup of coffee."
 
Source: http://www.moneyweek.com/investments/commodities/how-to-profit-from...
 
And, for the fractavististas - it takes 10,000 gallons of water to produce one Tofu Turkey!
 
So, a meager couple million gallons of water to frac a well  that will potentially produce vast quantities of Natural Gas is a bargain (after all, it is just a couple hundred Tofu Turkeys worth of water).
 
To make the deal even better, one of the two principal products of burning Natural Gas is H2O (water) - we ultimately get the water back, along with a bunch of its friends.
 
All IMHO,
                 JS
 
 
Permalink Reply by Anastasia on August 15, 2012 at 2:29am

What will make the difference is when the Northeast is finally off of coal and heating oil for home heat - but right now there's not enough infrastructure for widespread conversion.  Most new construction will be equipped with natural gas hookups, and if New York would ever get with the program, it could be huge.  But I bet it will be as much as 10 years before there is enough of an increase in demand for the price to go up. 

Permalink Reply by Jack Straw on August 15, 2012 at 6:41am

RE: "What will make the difference is when the Northeast is finally off of coal and heating oil for home heat - but right now there's not enough infrastructure for widespread conversion."

 

That is a significant statement.

Heating Oil is pretty nasty stuff, one of the dregs of the refining process.

When you have sequestered the 'better" products, you are left with the "Residuals" - Fuel Oil (Heating Oil), Tar, Asphalt, etc. The resids contain some substances that you do not want to get into the soil or water table. The resids contain some substances that you do not want to breathe. The burning of the resids produces some combustion byproducts that you do not want to breathe.

Our Government has squandered huge sums of money on uneconomic endeavors - money that has come out our (taxpayer) pockets. Rather than trying to promote technologies that are doomed to failure (think Solyndra) or subsidize industries that host jobs overseas (think Fiskars, etc.) - we should be investing in the infrastructure that will create American jobs, while cleaning up our environment.

Our Government should promote the residential conversion from (imported) Heating Oil to Clean, Green (domestic) Natural Gas. We should be retiring the old leaky residential heating oil tanks, scrapping the Heating Oil fired boilers and move to Clean, Green (domestic) Natural Gas.

Clean up our air, clean up our water, clean up our "Balance of Payments".

Do it for your children, grandchildren and great grandchildren!

 

All IMHO,

                 JS

Permalink Reply by Steven A Joliat on August 22, 2012 at 4:11pm

Jack,

A minor clarification, as I understand your intentions, residual fuel oil aka bunker, no.6 is a heavy gooey residue of the refining process and is most often used for power generation in larger facilities.  When conveyed from storage to burner it often requires heating to get it flowing.  No. 2 heating oil is commonly used for residential oil furnaces and boilers and is more akin to diesel fuel, a lighter distillate of the crude refining process.  Number 6 oil when spilled into the surrounding soil, can be cleaned up with a number of commercially available treatments familiar to the remediation industry.  I agree we should get the northeast off of home heating oil as natural gas is much cleaner burning and historically less susceptible to price swings.  I installed a number of gas conversion burners for small coal and oil fired boilers in the 60s and 70s so the technology has been around for a long time.  It helped me raise the money to go to college and become a geologist.

Permalink Reply by Jack Straw on August 23, 2012 at 2:48pm

Steven, thanks for the clarification/correction; refining is not my forte'; No. 2 heating oil is a distillate, rather than residual.

If memory serves me right, no.6 residual oil/bunker fuel is used in NE cities in heating boilers for (at least) some businesses and multi-resident (apartment) buildings - circumstances where cheaper (nasty) bunker fuel can economically justify the problems that come along with it.

Again, if memory serves me right (a few years ago) New York City labored to eliminate the use of residual fuel oil in the city. Not sure as to how much success they had.

 

All in my imperfect memory,

                                                JS

Permalink Reply by Steven A Joliat on August 26, 2012 at 3:50am

Yes, it's use is likely in larger sized boilers that would supply steam for buildings larger than 10-20000 square feet.  My experience was mostly in NE Ohio where the business blocks and apartment boilers were mostly coal fired.  Most of the oil fired units I saw were residential sized, too small to have the necessary ancillary heating units to liquefy the residual oil.  I had been thinking more along the lines of the high pressure industrial boilers often naval surplus from post WWII.  But that all is really just splitting hairs.  Oil is mostly a poor choice when compared to gas for heating and industrial process steam generation.  I think NYC is not alone in phasing it out.

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