Natural Gas Producers Face North American Oversupply
by Jim Fuquay
McClatchy-Tribune Information Services -- Unrestri 3/26/2009
URL: http://www.rigzone.com/news/article....
Natural gas prices have strengthened in the past week, but a new study by one of the nation's most-respected energy forecasters suggests that until demand returns, producers face a long-term oversupply in North America.
Cambridge Energy Research Associates said new sources of natural gas, notably shale gas fields such as North Texas' Barnett Shale, have dramatically boosted reserves and production capacity. Just as importantly, the study concludes, so-called unconventional gas fields like the Barnett should maintain their production longer, meaning that reduced drilling rates will have less impact on production than previously assumed.
"North American gas production is no longer opportunity constrained," Robert Ineson, one of the study's authors, said in a prepared release.
Gas shales and other new gas resources "are extensive, and North America now has a sufficient inventory of drillable prospects to maintain or, if necessary, increase productive capacity for at least the next 10 years -- even after the current recession becomes a memory," Ineson said.
Producers in the Barnett Shale and elsewhere have slashed drilling budgets in response to low prices in recent months. In the Barnett Shale, the number of active drilling rigs has fallen by more than half from its peak in October, and the rig count nationwide is down 47 percent.
In the view of most producers, the sharply lower drilling will translate into declining production by year's end. Natural gas wells typically experience a decline of at least 50 percent from their initial production in their first year, with lesser declines for several years before flattening.
The U.S. Energy Department, for example, forecasts a 5 percent decline in natural gas production during the year's fourth quarter.
"Fundamentally, the only thing you've got to hang your hat on is the drastic cut in rig counts, if you're a bull," Brad Florer, a trader at Kottke Associates in Louisville, Ky., told Bloomberg News on Tuesday.
Tuesday, natural gas futures rose 5.3 cents to $4.347 per million Btu, its highest since Feb. 13. Still, gas futures are down 23 percent for the year.
According to a Bloomberg survey of 20 analysts, natural gas is expected to average $6.84 in the fourth quarter and $7.50 in 2010.
But Cambridge takes the view that there has been so much development of new sources of gas that the decline rate in production will be less than before. This means, the study says, "that a smaller quantity of new production is required to offset natural production declines."
As a result, Cambridge forecasts natural gas production capacity in North America to rise to 80.2 billion cubic feet a day by 2018, up 16 percent from 69.3 billion cubic feet last year.
Cambridge expects the oversupply in North America to ripple around the world, as the United States needs less imported gas, in the form of liquefied natural gas.
Even as world LNG capacity has nearly doubled since 2000, the report said, the lack of U.S. demand has the potential to keep down prices and affect the viability of LNG projects worldwide.
Copyright (C) 2009, Fort Worth Star-Telegram, Texas
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