Luncheon – January 16, 2009

Title: Perspectives on U.S. Natural Gas

Speaker: By Pete Stark, IHS Energy, Inc.

Date: January 16, 2009

Publication: The Outcrop, January 2009, p. 18-19

Three global mega-challenges have combined to create a perfect storm for world economies. Over the past 18 months focus on the climate change crisis gave way to soaring oil and gas prices and then passed on to the global financial crisis. The U.S. natural gas business has not been unscathed by this turmoil. Unfortunately, a welcomed surge in U.S. natural gas production emerged on the cusp of the economic recession and slumping energy demand. Good news for consumers is the fact that oil and gas prices have dropped 50% or more from first half 2008 highs. These factors, though, pose significant concerns for oil and gas producers and could signal a paradigm shift in U.S. energy markets and policies.

On the positive side, innovative gas producers have “broken the code” to unlock productivity from shale gas and other unconventional reservoirs. Success in the Barnett shale spread to the Fayetteville, Woodford, Haynesville and Marcellus shales with promising tests underway in other important shale source rocks. As a result of higher well productivities in these shales, U.S. average well peak production and EURs increased during 2007, breaking a 10-year decline in these parameters. Correspondingly, U.S. gas production capacity increased by some 4.5% during 2007 and about 9% during 2008. Moreover, recoverable gas resources may have increased by 500 Tcf or more during the past two years. This is good news for U.S. energy security and provides welcome flexibility for future energy planning. In the near term, the surge in gas productivity allowed the recovery of U.S. gas storage to more than 3.4 Tcf during November 2008 – assuring adequate gas for the 2008-09 winter heating season in spite of the fact that 5 Bcf per day of Gulf Coast gas production was curtailed by damage from Hurricane Ike.

There are several negative factors:

  • Natural gas prices averaged about $9 per Mcf during 2008 but have slumped below $7 per Mcf and are unlikely to recover much during 2009. With Henry Hub gas at $7 per Mcf it is estimated that only about 35% of U.S. gas developments yield at least 10% ROR.
  • Soaring Rockies gas production has exceeded export pipe capacity with resulting large discounts in gas prices and curtailed production.
  • Huge new gas resources in the Ark-La-Tex region and Appalachian basin that have established pipelines and are close to the large consumers may reshape U.S. gas markets.
  • Upstream costs continued to increase during 2008 adding to the squeeze on gas wellhead profits. High cost gas plays could suffer substantial drilling cutbacks during 2009.
  • The change in administration is accompanied by increasing power for anti-oil and gas politicians. At this time it is not clear if their punitive attitudes toward oil and gas will prevail or of they will forge new clean energy policies that capitalize on secure domestic gas resources.

We will review these factors with respect to future directions for the U.S. gas business.