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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
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Permalink Reply by Jack Straw on
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An interesting article entitled “America’s Energy Seen Adding 3.6 Million Jobs Along With 3% GDP”.
The article can be found at: http://www.bloomberg.com/news/2012-08-13/america-s-energy-seen-addi...
I'm Jack Straw, and I approve of this message.
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Permalink Reply by Jack Straw on
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Permalink Reply by Bluflame on
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Jack,
That is a really funny editorial cartoon. Would be even funnier if it were not true! Just yesterday, two new wind farms were announced for west-central Ohio. Even with $11/MCF natural gas, wind energy is only marginally viable economically.
It also suffers from infrastructure challenges to link the wind turbines to the electric grid. Wind conditions in this part of Ohio are borderline for wind energy. And all that is before an ROI calculation. So the "shakedown" continues!
What can these people be thinking?!?
BluFlame
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Permalink Reply by Jack Straw on
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And we are screwed in multiple ways:
as taxpayers who provide loans that will never be repaid,
as taxpayers who provide loan guarantees for enterprises that ultimately fail,
as taxpayers in the form or subsidies and "research grants",
as ratepayers - paying higher utility rates to make up for uncompetative energy sources,
as Americans - as U.S. $ move overseas (to where the equipment is manufactured),
as Americans - as domestic energy, resources and jobs are neglected.
All IMHO,
JS
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Permalink Reply by Bluflame on
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I was briefly in the wind energy business a few years ago when NG prices were astronomically high. At that point, via a combination of federal and state (Ohio) grants, consumers could fund ~90% of a wind turbine project. The grants were targeted for "kilowatt"-sized projects versus "megawatt"-sized projects. The latter are the very large utility sized units affiliated with wind farms.
As a result of this largesse, you see a smattering of wind turbines across northern and western Ohio of less than one megawatt size. Many of these are on school campuses and other public and private entities where the end user is experienced with the "grant game". The taxpayer shakedown scene depicted in the cartoon is a good analogy of this process!
Further sweetening the pot, the electric utilities were (are) required to purchase the excess electricity generated by the turbines and not consumed on site. And as the cherry on top of the whipped cream, the electric utilities have a state-mandated requirement to produce 20% of their electricity from renewables by 2025. The % and date could be wrong as my age-ravaged memory is fading, but you get the idea.
Seems to me, with the availability of low cost (at least currently), environmentally-friendly, Ohio-produced natural gas, our illustrious state fathers should go back to the drawing board on these programs.
BluFlame
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Permalink Reply by lynn on
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Not just are state fathers-the worst is in Washington. I live by a perfect example-Western Reserve schools. Matching money to put up two turbines four years ago. They were supposed to provide 25% of the new building's electric-they never replaced more than 5% needed by the old building. On top of that they only ran about three months in total because of various problems. One turbine blew apart and hit the ground. The company (not US mfg) is out of business. Tax dollars wasted at every level.
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Permalink Reply by Bluflame on
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Hello Lynn,
Based on my analysis during my short period in wind energy, wind conditions in Ohio create marginal returns for wind turbines. Of course, the people preparing the grant applications write their proposals wearing rose-colored glasses. It takes a few years for reality to set in, and at that point the money has "left Dodge City".
Don't know where Western Reserve schools are located, but another wind turbine disintegrated in Sandusky. The rotor fell in the school parking lot in the middle of the night and, miraculously there was no ancillary damage and no injuries. Of course, maintenance problems are not factored into the ROI equations.
The "Catch 22" with wind energy is coordination with electric grids. Specifically, where wind conditions are favorable in places like North Dakota and West Texas, there are no grids for 100's of miles capable of transporting large electricity current. In Ohio, we have the electric grid, but marginal wind conditions.
All this is confirmed by your comments about Western Reserve schools.
BluFlame
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Permalink Reply by Jack Straw on
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Source: http://www.upi.com/Business_News/Energy-Resources/2012/08/22/Pennsy...
Pennsylvania gas boom under way
Published: Aug. 22, 2012 at 7:56 AM
HARRISBURG, Pa., Aug. 22 (UPI) -- Natural gas production from the Marcellus shale play in Pennsylvania is up more than 80 percent from 2011, the state government said.
A Platts review of information from the Pennsylvania Department of Environmental Protection said natural gas production in the Marcellus shale play for the first six months of 2012 increased 82 percent compared with the same time last year.
Production reached 4.36 billion cubic feet per day for the first half of 2012, while operators reported 2.5 billion cubic feet per day during the same time last year.
Chesapeake Energy accounted for roughly one-quarter of the unconventional natural gas production in the state during the first six months.
The U.S. Energy Department's Energy Information Administration reports that Texas led the country in natural gas gains because of developments in the Barnett and Haynesville-Bossier shale formation. Louisiana was close behind with its Haynesville play while Pennsylvania saw gains from the Marcellus shale formation.
U.S. proven natural gas reserves totaled 317.6 trillion cubic feet in 2010.
Platts reported that not all companies delivered information to the DEP.
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Permalink Reply by Jack Straw on
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A picture is worth a thousand words.... and a bunch of plots can be worth a lot.
These "U.S. Natural Gas Storage Charts" may be of interest to those who would like to see how the natural gas storage situation is playing out.
These plots were updated to include today's IEA report.
The Charts can be found here: http://www.investorvillage.com/uploads/8708/files/USNaturalGasStora...
JS
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Permalink Reply by Bluflame on
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Thanks Jack,
Looks like there is a chance to return to normal storage conditions over the next several months. This may be the first time I've ever wished for a c-o-l-d winter!
BluFlame
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Permalink Reply by Jack Straw on
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Natural Gas has long been seen as a fuel for Winter heating - a warm Winter meant that the following Spring saw an excess of natural gas in storage (as utilities always need to go into Winter with full storage - to assure an adequate supply) - a cold Winter can mean that spot prices surge during the Winter, and the following Spring natural gas remaining in storage is anomalously low (starting a scramble to assure adequate storage for the next winter).
A secondary situation depends upon whether the Summer is anomalously hot or the Summer is anomalously cool. Natural Gas "peakers" supply electricity for the extra load of air conditioning on those hot days.
Yet another potential load would be an anomalously cool Spring (late Winter), or an anomalously cool Fall (early Winter).
Regardless, historically, natural gas usage and natural gas prices have largely been hostage to the vagaries of the weather.
Geography also has its effect.
Natural gas for heating has been most important in the Mid-Continent.
Natural gas use for Summer cooling has been most important in the deep South.
Things are changing:
in the West and NW, where hydro-electric has been maxed out – natural gas is becoming a more important fuel,
industries lost to foreign competition are returning to America; cheap natural gas (and associated natural gas liquids) are a feedstock for fertilizer and for the chemical industry (plastics, etc.). Rather than making ethanol for a gasoline oxygenate, ethanol can be made from natural gas and/or natural gas liquids,
cheap natural gas is displacing cheap (but dirty) coal in generating electricity in the Mid-Continent and Mid-Atlantic,cheap natural gas is making inroads as a transportation fuel,
excess natural could be liquefied and exported as LNG (again to the benefit of America’s balance of payments),
Importantly; the high costs of heating oil in the Northeast (where it has been the traditional Winter heating fuel) have spurred a changeover from heating oil to natural gas - where infrastructure exists.This changeover has been prompted by both the current high costs of heating oil and the current low costs of natural gas.
There are two serious obstacles to the changeover from heating oil to natural gas: the costs of conversion and the lack of necessary infrastructure.
Conversion costs are a particular obstacle to seniors/elderly and to low income citizens – the people least able to afford high heating costs are the ones often least able to afford the (one-time) conversion costs.
Infrastructure is a more intractable problem, without a distribution system, conversion to natural gas is a “pipe dream” (pun intended).
Currently our government are spending (squandering?) large amounts of taxpayer money on a "fool’s errand" of pushing uneconomic technologies – robbing from the poor (and shrinking middle class) and giving to the rich – this primarily done by the a political party that claims to champion the common man (you know, the people who ultimately pick up the tab).How much better would it be if funds currently disappearing down an apparently bottomless rat hole instead went towards developing infrastructure (using long existing technology) that would deliver domestic natural gas to those who could benefit from it.
How much better would it be if funds currently disappearing down an apparently bottomless rat hole instead went towards giving low interest loans to seniors/elderly and to low income citizens to assist them in converting from expensive imported heating oil to cheap domestic natural gas; loans that could (and would) be repaid via a tariff on the natural gas they used (until, and only until their particular loan was repaid).
Government promoting the conversion to natural gas would result in savings to many (and particularly to those you most need it).Government promoting the conversion to natural gas would result in domestic natural gas displacing imported oil; improving our balance of payments (and incidentally improving our air quality).
Government promoting the conversion to natural gas would result in American jobs in America, at a time of high unemployment.
Just think what could be accomplished were the Government to decide to help in promoting natural gas.
Heck, if they will not help, just think what could be accomplished if the Government simply got out of the way!My name is Jack Straw, and I approve of this rant.
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Permalink Reply by Bluflame on
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Hello Jack,
An impressive rant! I also approve! I am probably a naive optimist, but the government typically is a bit behind the power curve. They are better at reaction than at leading the charge. So, just maybe they will begin to grasp the significance of this terrific NG resource and develop programs to exploit and expand the opportunity. Really, we should be transferring our scarce financial resources from "renewables" to NG.
Of course, they will need to deal with the fractivists. But their position has been pretty much discounted by all legitimate studies including the EPA. But, we lessors have skin in the game and therefore have our own biases.
BluFlame
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