COLUMN-Bakken set to edge out Canadian gas in US Midwest: Kemp

Wednesday, August 22, 2012

LONDON, Aug 22 (Reuters) - North Dakota's rising gas production will edge out competing supplies from Canada and the rest of the United States, as the superior returns enable local producers to undercut more distant rivals for space on the interstate pipeline network to supply Chicago and other big gas-consuming cities in the upper Midwest.

That is the conclusion of a report by leading consultants Bentek Energy presented to the North Dakota Pipeline Authority on August 14 ("The Williston Basin: Greasing the Gears for Growth in North Dakota").

North Dakota's gas production has surged from around 150 million cubic feet (mcf) per day in the early 2000s to 536 million in 2011, and will hit 3.1 billion cubic feet (bcf) per day by 2025, according to Bentek projections, with a forecast range of 2.0 to 3.8 billion.

Bentek's study found that current spare capacity would not be sufficient to accommodate all North Dakota's extra gas without changes. But the authors concluded local producers will be able to secure sufficient space by undercutting rivals from Canada as well as the southern and western United States on pipelines into Chicago and other big cities in the upper Midwest.

Bentek estimates the typical Bakken well is earning an internal rate of return of 58 percent, based on gas prices of $2.45-$2.86 per million British thermal units (mmBtu) and WTI prices of $84-100 per barrel.

Only a handful of other plays offer better returns. Most are worse. The internal rate of return on even the most liquid-rich parts of the Marcellus is currently estimated at 24 percent, according to Bentek's analysis, dropping to just 3 percent in areas with dry-gas wells.

Bentek's central forecast assumes Canadian imports will fall from 5.7 bcf per day in 2011 to just 3.2 bcf per day by 2017.

Bentek sees this as a competition Bakken producers will win. They will have to price aggressively to displace incumbents on the pipeline network, but favourable economics mean they have deeper pockets than enough rivals to secure the capacity they need.

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