Natural Gas Intelligence
U.S. Natgas Triggers 'Butterfly Effect,' Say Experts

Monday, May 21, 2012

When North American operators successfully used technology to tap into unconventional onshore natural gas reserves, it triggered a shift in the markets that has upended activity around the world, but where it leads is still a question to be answered, two long-time market watchers said last Thursday.

Speaking on the final day of the fourth annual Benposium in Houston, Bentek Energy's Jim Simpson, who also is vice president of Platts Power Group, said a "butterfly effect" will trigger major gas price increases by 2015.

Today "low natural gas prices started a wave of other events," that in turn will lead back to higher gas prices, said Simpson. He pointed to the Department of Energy now considering several liquefied natural gas (LNG) export projects, which "makes complete logical sense, to build a bridge from a low-priced market to a high-priced market" in Asia, where prices for gas are about $15. "It seems too easy to wait until 2016 to wait for price impacts."

Simpson has "looked and thought a lot" about activity going on in other sectors affected by new supplies of gas. The technology that led to gas growth now has created a natural gas liquids (NGL) and oil bonanza, which in turn has created opportunities. Still, trying to put all of the commodities into an understandable formula proved difficult.

"I only understand Bcf/day," said Simpson. So he created a "U.S. energy exports Bcf/d cowboy math equivalent," a rough, "apples to oranges to pears" equivalent that uses 2011 as the zero basis, and he carried the equation to 2017 (2011 coal-to-Bcfe prices and supply/demand calculations were used).

Baking in average U.S. gas consumption, estimated growth in power generation and coal-to-gas burn figures, coal exports, residential/commercial forecasts, an average of 6 Bcf/d of LNG exports, and all the rest, the cowboy math boiled down to the United States being about 10 Bcf/d higher by 2017 than in 2011, said Simpson.

"At the same time, we're building export facilities," he told the audience. "Certainly at $2.50 we're starting to look at the horizon on how to burn more and who's going to burn it..."

Commodity producers "are creating options, which is what they should be doing, and it makes sense," said Simpson. But he said, "end users should be wary. Export infrastructure is like building a pipeline from low to high prices...

"The REX [Rockies Express Pipeline] and Rockies basis were a big deal," when the pipeline was built to carry constrained gas to thirsty eastern markets, but what happened? "Prices tend to equate to each other, and we're sort of in the same boat. Every commodity is in its own box...Add the boxes up, and it ends up a pretty sizable energy equivalent...Better connectivity means better pricing."

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