Since natural gas is more of a regional market than oil, which is more global, we Norte Americanos tend to estimate future gas prices with reference to factors such as likely Canadian supply and local inventory levels.  But imports of LNG are increasingly important to our continent’s gas price.  To obtain LNG deliveries, our terminals bid against those in Europe, Asia, and elsewhere.  Recently our gas prices have been lower than some abroad thus diverting some LNG shipments away from the the U.S.  

In Europe and Asia these days there is apprehension about whether there will be sufficient future supplies of natural gas and at what price.  In fact, quite a number of strains on global NG supplies have been noted on this site and are posted here.  Such strains may underlie the recent increase in the U.S. NG price from a $7 - $8 range to currently just under $11.  Prices could run further, as many analysts note that the NG price relative to the oil price is much lower than its $19 energy equivalency based on $115 for oil. 

Chris Skrebowski, the London-based Editor of Petroleum Review sketches his perspective on NG in the March issue in a piece titled, “Just a Little Nervousness?” It describes presentations by various participants in a recent industry gathering. Here are some highlights:

- Novatek, Russia’s second largest gas company, presented comparative data on Russian gas supply and demand with European and FSU demand projected for 2010.  The comparison indicated a shortfall of 77 bn cm which is greater than Asian supplies that have been contracted for by Gazprom.  Moreover, Russia is scheduled to start exporting gas to China starting around 2010.  It was also noted that Gazprom’s production is declining and is not scheduled to begin to increase until the Shtokman field comes on stream in 2013.

- Some Europeans have held high hopes that the Nobucco pipeline would bring non-Russian gas to Europe.  Skrebowski writes, “With only limited incremental quantities of export gas from Azerbaijan, Iraq still in chaos, and Iran years behind on its gas development programme, it is most unclear what gas will be available to fill the Nabucco pipeline.”

- In terms of LNG, he writes, “Apparently there is little or no subcontracted LNG available before 2013 - a sobering fact for all those European governments planning to buy LNG to cover supply shortfalls.”

The bottom line is thus substantial pessimism about the sufficiency of NG supplies to meet European demand in 2010 and thereafter.  That suggests more intense competition for limited LNG supplies around the world within a year or two and therefore even higher LNG prices.

For the U.S. more LNG competition means either much higher NG prices or dependence on domestic and Canadian supplies to meet our demand.  There have been a number of new, major unconventional gas fields in the U.S. and Canada that have recently become feasible to exploit because of new technology.  New horizontal drilling technologies are being applied in the Rocky Mountain region, the Horn River and elsewhere  to produce substantial quantities of gas.  Some of it has not been able to get to market, but new pipelines are coming on stream.  So there is a general sense of increasing optimism about North American supplies.

On the other hand, one must remember that such new fields may have extremely short lives and very rapid decline rates. The gigantic Barnett Shale gas fields, for example, seem to have peaked after only a few years of exploitation. 

On the demand side, however, there has been some talk of using natural gas to substitute for the loss of a number of new coal fired generating plants that have recently been canceled or put on hold for environmental reasons. It would be ironic if the optimism about new gas supplies led decision makers to become confident enough about the future availability of gas to increase their reliance on gas for new electrical capacity.   Such new demand could increase gas  demand just as high decline rates curtail the flow of North American gas fields and competition increased for LNG deliveries.

I have not seen a comprehensive N. American natural gas demand/supply model going forward.  There are certainly prodigious amounts of gas yet to be harvested or even discovered on our continent.  But gas decline rates are rapid and remotely located supplies require new pipelines that can take a very long time to build.  It seems clear that the competition the U.S. will face for LNG is likely to become more difficult.   

From a technical viewpoint, the natural gas chart looks good. From a fundamental value viewpoint, the gas price could double before equaling either prices abroad or its energy equivalency to oil.  Considering all these factors, the price could have substantial upside over the next five years and there seems to be good reason for investors to want to own long dated natural gas.  Moreover, given the abundance of potential gas E&P opportunities, the stocks of gas producers also seem attractive.

Tags: peak oil energy investments

This entry was posted on Friday, April 25th, 2008 at 8:05 am and is filed under LNG, NATURAL GAS, supply of gas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.