Natural Gas Intelligence
Gas Glut Taking Time to Adapt, Says BENTEK Exec

Monday, May 21, 2012

Whether the natural gas market is "proactive or reactive" today doesn't matter much in the grand scheme of things, according to Bentek Energy's Jack Weixel. Like the chicken or the egg metaphor, asking which came first, gross gas production or dry gas production is irrelevant when considering that today output is 20 Bcf/d higher than in 2006.

The real question is how will the market adapt, or rather, what's the market going to do with all the production?

Weixel, who directs client services for the Evergreen, CO-based energy analytical services firm, spoke last week at the fourth annual Benposium in Houston. The gas glut, he noted, has proven a positive for some sectors and spilled over into even more:

Coal-to-gas switching at power plants;

Early coal plant retirements, leading to more gas-fired generation;

Industrial demand in the United States and Canada;

Liquefied natural gas (LNG) export projects across North America; and

Natural gas liquids, leading to growth in petrochemical expansions nationwide.
The "technology breakthroughs" that led to unconventional onshore gas discover
ies in North America now have washed across the oil sector, leading to a "crude oil awakening," noted Weixel. "That's a big deal that's allowed the United States to be more energy independent...that may finally lead to energy independence..."

The United States, however, is net long 3.9 Bcf/d year-to-date, he said.

To date Bentek estimates that North American gas production is averaging around 63.9 Bcf/d, versus 61.5 Bcf/d a year ago and 57.1 Bcf/d at the same time in 2010. Domestic gas output has slowed a bit, but not nearly enough to stave off likely shut-ins this summer.

"The long position is starting to get gobbled up, it's starting to get absorbed," said Weixel. "There's been a slight dip in production since the beginning of the year, and we are slowly working our way down to zero. Whether we work our way to zero by the end of the year is a question..."

The United States added 4.2 Bcf/d of gas output last year -- "phenomenal" growth for one year. But, "it will take us to the fourth quarter of 2013...another 18 to 21 months to add another 4.2 Bcf/d. Production is slowing. But once we are out to the 2017 time frame, Bentek sees an incremental 13.7 Bcf/d for the market to deal with.

"The production forecast is constrained to a large degree. What will it take to get to 13.7 is some demand growth. We have to watch out for the state of the economy, certain projects to emerge. It helps if there are good economic tidings to bring in money for LNG export projects, that sort of thing. A lot of conditions are in this forecast. It's pretty obvious that the production train is slowing but it's not grinding to a halt."

Why the spigots remain open is simple. The internal rate of return for producers in the Permian Basin, Eagle Ford Shale, Granite Wash and Mississippian Lime plays are "drastically greater" in liquids/oil than in strictly dry gas -- but with liquids, gas is a byproduct.

However, Bentek's analytical team sees a big market for a lot of excess gas. Among other things, 46 new facilities are being proposed in the United States and Canada for manufacturing/petrochemicals that would take gas capacity. If two of the huge gas-to-liquids plants were to come to fruition, "we could see an incremental 1-2 Bcf/d, a huge jump, in incremental demand, the equivalent of two LNG export facilities," noted Weixel.

Most important would be the increase in the power market's potential demand, which could increase by more than 36%, taking a whopping 7.6 Bcf/d as coal burners convert to gas and new gas-fired capacity comes on line.

"Gas will play a big part out to 2017," said Weixel. "Our anticipation of gas prices is around $3.50 for the next five years on average. There will be moments of volatility. As power plants come steaming on, LNG facilities, it's a good thing for some market participation, but a steady, slow burn, if you will, in the price of gas that is tempered by producers' ability to react to an increase in demand...

"Chicken or the egg, who cares? Gas production growth will moderate over the next 18-24 months. As demand kicks in it will be more attractive."

To access this report, please visit intelligencepress.com.