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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 Dan on
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Jack,
The Goverment can promote away or get out of the way. Lets keep them in the propaganda business where they belong and out of the wealth redistribution business. The gas utilities can offer cost effective retrofits spread out over 5 or 7 years tagged onto the monthly bill. The utility sees increased usage and can get a 2% bump on the financing and the customer gets a less expensive more comfortable heat source etc. with only a few extra dollars a month after utility savings. Some electric utilities do this now for effeceint building upgrades. Let the gas utilities promote themselves...........shut the valve on the everflowing subsidies, tax credits, incentives and all other forms of controled wealth redistribution.
Dan
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Permalink Reply by Jack Straw on
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Source: http://www.investingdaily.com/15585/king-coal-abdicates-to-natural-gas
King Coal Abdicates to Natural Gas
by Roger S. Conrad on August 24, 2012
Long the undisputed king of American energy, regulators have forced coal to the ropes in recent years. Efforts to regulate carbon dioxide emissions from burning the black mineral have even reached nations as far-flung as Australia.
In the US, however, even a Democratic supermajority in Congress couldn’t push through cap-and-trade legislation in the last session, and so much as a mention of such a regulatory approach is heresy among Republicans. Although that legislation was ultimately stymied, North American coal mining and coal-burning companies have nevertheless felt the pinch of tightening regulation. Officials of successive presidential administrations have progressively restricted emissions of mercury and acid rain gases for public health reasons from power and industrial plants. Meanwhile, aggressive mining techniques have also been cut back, most often due to fierce local opposition.
The biggest blow to King Coal has come from the crash in the price of natural gas. Thanks to the rapid discovery and development of reserves from shale over the past few years, America has an abundance of gas that’s likely to last years.
And don’t look for exports to provide any meaningful arbitrage with higher priced global energy commodities anytime soon. At this point, liquefied natural gas (LNG) facilities in North America are exclusively geared toward imports. That’s the legacy of Hurricanes Katrina and Rita, which in 2005 interrupted Gulf of Mexico production, devastated the Gulf Coast, and ran gas prices to the high teens per million British Thermal Units.
At the time, few envisioned the need would ever arise to export North American gas to foreign shores. And the construction of the facilities necessary for such exports faces formidable regulatory and environmental permitting hurdles, just as building the LNG import assets did. That means the most likely sites are located at existing import facilities. It’s hugely expensive work, which further limits the number of companies that can handle it. And even when those challenges are overcome, it still requires substantial time to complete and test such complex engineering projects before they can commence operation.
The upshot: It will be the end of the decade before even the projects already announced–such as Dominion Resources’ (NYSE: D) Cove Point Maryland facility–will be up and running. That means North America’s shale gas abundance can’t be distributed overseas until then. So prices are likely to stay low for a long time.
Moreover, natural gas emits less than half the carbon dioxide of coal when burned to generate electricity, and only a tiny fraction of the mercury, acid rain gases and particulate matter. By favoring natural gas over coal, power companies can not only cut their fuel costs, they can also protect their operations from current and future federal regulations on emissions.
And there’s no shortage of companies willing and able to build the needed infrastructure to bring shale gas supplies to utilities. Spectra Energy Corp (NYSE: SE), for example, has centered the lion’s share of its $8 billion current capital spending program toward bringing gas to power companies. The energy midstream giant has major projects underway to bring Marcellus Shale gas to the traditionally coal-dependent Southeast US, as well as to dramatically expand gas transmission capacity into the relatively energy-starved Florida.
Even smaller companies are finding ways to get into the act. Carolinas-based gas distributor Piedmont Natural Gas (NYSE: PNY), for example, has built and now operates gas storage facilities for units of Duke Energy (NYSE: DUK). Those facilities provide fee-based income under long-term contracts for Piedmont in all seasons, which has enabled the company to escape some of its dependence on the crucial winter heating season.
Small wonder then that America’s power utilities are making a dash for gas, with a corresponding retreat from coal. This year, gas will generate 23 percent more electricity in the US than it did in 2011. Use of coal, meanwhile, is on track to fall by 12 percent, even as electricity demand is on the rise again, as industrial firms recover from the downturn and consumers increase their dependence on devices needed for expanding global connectivity.
Even Southern Company (NYSE: SO), long one of the largest consumers of the black mineral in the world, is radically revamping its generating fleet. Some 47 percent of the company’s power is now generated from gas, up nearly threefold from just five years ago. At the same time, coal has fallen from 70 percent of output to just 35 percent. The Atlanta-based utility isn’t wholly abandoning its coal plants. In fact, it’s keeping its largest and newest facilities, and continues to develop a state-of-the-art integrated gasification combined cycle (IGCC) plant in Mississippi. If the IGCC plant is able to operate in an efficient manner, it will likely eliminate coal’s environmental disadvantages almost entirely.
Additionally, Southern has dramatically improved its fuel flexibility. It’s ready to proceed with whatever fuel makes economic sense in terms of price and the cost of regulation. And the result is that one of North America’s biggest consumers of coal is no longer dependent on the black mineral.
These developments don’t bode well for coal, which has suffered a relentless price decline in the US, along with falling output. Second-quarter 2012 was a tough time for many coal companies, and there’s no indication the situation will improve much during the second half of the year or in 2013.
However, King Coal did score a major victory in the courts this week. The Court of Appeals for the District of Columbia struck down the Environmental Protection Agency’s (EPA) rules on cross-state air pollution.
This decision vacates a controversial plan enacted by the EPA to radically increase the pace of cuts of acid rain gases. Power producers that still depend on coal claimed such cuts would cost billions of dollars and force them to make changes to the power supply that would not make economic sense otherwise. The rejection of the Obama administration’s plan reinstates Bush-era rules that stretch the timeline for compliance to the end of the decade and beyond. The decision is a major victory for electric utilities that have historically been heavily reliant on coal, particularly Southern and American Electric Power Company (NYSE: AEP).
It also benefits the embattled unregulated power generating unit of Edison International–Mission Energy–which may be headed for bankruptcy anyway. And it’s a plus for the now private equity owned Energy Future, formerly TXU. This could have implications for the Texas power market, which is nearing a capacity shortage, as low natural gas prices discourage building additional infrastructure. Energy Future says it will now keep two facilities open it had otherwise planned to shutter.
How much this decision helps the two sectors worst hit by coal’s long descent–coal miners and coal-reliant independent power producers–remains to be seen. NRG Energy’s (NYSE: NRG) ongoing acquisition of GenOn (NYSE: GEN) suddenly looks a lot smarter, as it convinces investors the synergies and scale of the deal are worth the additional $6 billion debt burden. But the rule change isn’t likely to be of much help for Dynegy (OTC: DYNIQ), as it tries to emerge from bankruptcy while preserving some shareholder value.
Coal mining companies, meanwhile, still face the crippling dynamic of low natural gas prices, which make it very hard for thermal coal to compete in power generation. Reviving industrial activity in North America as well as China’s insatiable demand for steel is likely to keep demand steady for metallurgical or “coking” coal. And mining companies often have other resource wealth on their lands in addition to coal, such as timber and valuable minerals.
These sources of cash flow are likely to prove especially important to dividend-paying coal miners, such as master limited partnerships and royalty trusts, in coming years. These companies’ ability to scale up, lock in long-term contracts, and potentially export to friendlier shores will also be key to their resilience. The future of the biggest players such as Peabody Energy Corp (NYSE: BTU), meanwhile, is indisputably overseas, particularly in Asia, and they’ve been directing their capital spending accordingly the past several years.
These companies still have a future. And arguably, investors’ tendency to view outcomes as “all or nothing” has left many of these companies trading at bargain valuations, which means solid returns for those who seek value.
No one, however, should expect this Appeals Court decision to return King Coal back to its throne atop North America’s energy heap, even if there is a new administration in the White House come January. Rather, consider it a reprieve that allows the industry to adjust to a long-term trend that appears inevitable.
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Permalink Reply by Jack Straw on
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Source: http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/6588529
Pemex prolongs critical natural gas alert through Monday
Mexico City (Platts)--24Aug2012/553 pm EDT/2153 GMT
Mexican state oil company Pemex said Friday that the "critical alert" on natural gas supplies in central and western Mexico will be extended through Monday.
This alert, originally announced on Wednesday, had been slated to end late Thursday.
"There is gas, but not enough to build sufficient pressure in the pipelines," a source at the company said.
Demand for natural gas has risen sharply in Mexico because of the impact of historically very low prices for imported gas from the United States. As a result, critical alerts -- which mean the suspension of supplies to major consumers -- have been common in recent months, though they usually last only for a day.
In the current alert, the shortage of supplies was aggravated when a bolt of lightening knocked out a pumping station in the southern Gulf state of Veracruz.
Late Thursday, President Felipe Calderon said the government aims to add 4,300 km (2,672 miles) of new natural gas pipelines, in large part to handle the increased imports. The new pipelines will add 40% more to the national network, he added. The 4,300 km, he added, "would be the equivalent of the distance between Tijuana and Cancun."
Tijuana is on Mexico's north-western border with the US. Cancun lies on the southeastern extreme of the nation.
--Ronald Buchanan, newsdesk@platts.com --Edited by Katharine Fraser, katharine_fraser@platts.comJack’s Comment: Although Mexico is an oil exporter, the oil that they produce has a low GOR (Gas-Oil Ratio). Oil rich, but Natural Gas poor – Mexico imports natural gas from the U.S.A.
Mexico appears to be getting “hooked” on cheap U.S.A. natural gas.
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Permalink Reply by Jack Straw on
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10 most expensive energy projects in the world
http://money.cnn.com/gallery/news/economy/2012/08/27/expensive-ener...
Please note how many of these 10 projects are Natural Gas associated.
And, please note where the majority of these projects are located.
JS
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Permalink Reply by David Perotto on
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Just a wild guess (I don't know if true) Australia's government embraces the O&G industry. They probably don't vilify them as evil corporations like the American left, including the current Obama Administration.
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Permalink Reply by Bluflame on
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Jack,
Makes Utica shale infrastructure projects including the anticipated Shell ethane cracker plant seem like child's play in comparison. Harkens back to previous discussions about our government getting behind this Natural Gas windfall we have, and putting renewables on the back burner.
Sure is interesting that none of the top ten projects are either wind or solar. The global investment community realizes where the future lies.
BluFlame
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Permalink Reply by Jack Straw on
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The World realizes that Natural Gas is a fuel for the future.
In places (such as the Northwest shelf of Australia) there is stranded natural gas; industry (without Government help, but thankfully without Government hindrance) are proceeding to invest private money to tap this resource.
America can attempt to lead, or America could follow, or America could ignore.
Projects move forward where Governments and citizens are intelligent and well informed.
Life moves slow where ignorance and the ignorant assert their influence.
It should be noted that American based multi-nationals are associated with many of the 10 mega-projects - none of those projects located in the U.S.A.
All IMHO,
JS
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Permalink Reply by 015334grltd9m on
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Now wait a minute, not all here in Youngstown are of the ignorant class; I realize the dumbing down of the majority in this urban center, but there are a few of us who can read and write a little :')
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Permalink Reply by Bluflame on
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So Ron, maybe you should set up your next shrimp farm in Australia!
BluFlame
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Flame, I just can't give up on the "hood."
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Permalink Reply by Bluflame on
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Jack,
Unfortunately, the die seems to have been cast. We're being left in the dust by the Australians (and others). Not sure we even have an LNG facility on the drawing board, and the Australians already have signed delivery contracts! I recall something in Louisiana, but I think it's only in the planning stages.
Also interesting that the big US-based E&P companies such as Chevron and Exxon are investors in several of these facilities. Too many hindrances here, I guess.
BluFlame
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Permalink Reply by Dan on
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Bluflame,
There are currently three LNG import terminals waiting for the OK to retro-fit to export".
Cove Point, MDCove Point is an existing LNG import terminal located in Calvert County,
Maryland, which was constructed in the mid 1970s. Deliveries were suspended in
1980 due to the high price of LNG imports. The Commission approved the
resumption of LNG imports in October 2001, and Cove Point received its first
commercial delivery in 23 years in August 2003.
On April 29, 2005, the
Commission issued a notice of application for authorization to expand the
existing Cove Point LNG terminal by: (1) adding two new storage tanks to
increase send-out capability and storage; and (2) constructing five new
pipelines totaling about 161 miles in length, to be located in Calvert, Prince
Georges, and Charles Counties, Maryland, and Juniata, Mifflin, Huntingdon,
Centre, Clinton, Green and Potter Counties, Pennsylvania, to deliver additional
capacity to pipeline connections in Virginia and Pennsylvania.Richmond-based Dominion Resources Inc. is seeking to export 1 billion cubic feet per day through a terminal it owns in Maryland. A legal settlement dating to the 1970s allows the Sierra Club to reject any significant changes regarding the natural gas terminal in Cove Point, Md., 60 miles southeast of Washington.http://marcellusdrilling.com/2012/04/sierra-club-will-try-to-block-...
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