As a natural gas price rally fuelled by the harshest winter in decades threatens to stretch beyond this spring, North American drillers face a conundrum.
In theory, the return to nearly $5 per million British thermal units (mmBtu) gas prices for futures contracts through March 2015 should offer just enough economic incentive to coax extra gas from the ground, allowing inventories to rebuild from potentially critically low levels over the summer.
Yet so far, North American drillers are reluctant to buy into the first bull market they have seen in years, fearful that the weather-induced rally will not last and betting that oil output still offers a more certain return.
ConocoPhillipswants benchmark natural gas prices to remain over $5 for as long as two years before the company boosts spending on natural gas, Chief Financial Officer Jeff Sheets said in a Jan. 30 interview.
"We won't be leaders in getting out there and drilling natural gas,” he said.
Call it the shale bind: with abundant supplies from shale fields such as the Marcellus in the U.S. Northeast or the Haynesville in Louisiana, there is little hope of a sustained revival in prices, and thus companies with long-term investment cycles are loathe to shift their focus. (More stories on shale oil and gas [ID:nL5N0L52JC])
The number of rigs drilling for natural gas in the United States fell by seven over the past week to 351, the lowest since 1995, according to data from oil services firm Baker Hughes.
Yet market analysts are also starting to look for signs of additional drilling that would help replenish stocks, without which prices may remain elevated for months longer. After languishing below $4.50 for years, prices surged last month to more than $5, their highest in four years.
This year's bitingly cold winter was initially written off as a short-term anomaly, causing isolated but dramatic price spikes in markets such as New England, where pipeline capacity was insufficient to meet the surge in demand.
But as the cold persists and expands, supplies are starting to strain across the country, forcing states including California and Texas to urge consumers to reduce power use to ease strain on the grid, partly because of limited gas supply.
At the end of January U.S. gas stocks fell to 1.92 trillion cubic feet, 556 billion cubic feet under the five-year average and the lowest level for this time of year in a decade, according to the Energy Information Administration (EIA).
The draw-down also shows that despite the discovery of decades' worth of natural gas reserves, the nation's energy system may not yet be robust enough to prevent the kind of unexpected shortages that have roiled the market.
The strain is so great that it now threatens to extend into 2015, according to some analysts.
Assuming that inventories are replenished at a normal rate over the summer, followed by an average winter cold season, the market may face "dangerously low" inventory levels in March 2015, BNP Paribas analyst Teri Viswanath wrote in a research note. BNP raised its 2014 price forecast by 40 cents to $4.60.
It is understandable that producers, jaded by a market that has been oversupplied for more than half a decade and busy drilling for more lucrative oil prospects, may be reluctant to invest the capital needed to boost production.
Natural gas prices peaked at over $13 per mmBtu in 2005 amid worries that North American supplies were no longer adequate to meet demand. But hydraulic fracturing and horizontal drilling technology freed massive natural gas supplies from shale deposits.
According to the EIA, natural gas production from shale fields in the continental United States rose 10 fold since 2005 to more than 30 bcf per day in 2013.
Prices have rallied occasionally, only to quickly fall again. Drillers are looking for oil now, not gas.
"We're staying the course," said Jay Averill, spokesman for top Canadian producer Encana Corp, which is in the midst of downsizing its operations as it moves away from producing dry natural gas in favor of more profitable liquids.
"Seventy-five percent of our investment is going to oil and natural-gas liquids. We already have a lot of gas, too much gas."
While gas traders are starting to bid up prices for the next 12 months, bracing for tightness, there is little sign that markets believe that the shortage will last. Thanks to the discovery of shale gas, total U.S. reserves have surged by more than half to 334 trillion cubic feet by 2011.
While spot natural gas is trading at more than $4.50 per mmBtu through March 2015, beyond that prices barely top $4. <0#NG:>
Source: Reuters
In theory, the return to nearly $5 per million British thermal units (mmBtu) gas prices for futures contracts through March 2015 should offer just enough economic incentive to coax extra gas from the ground, allowing inventories to rebuild from potentially critically low levels over the summer.
Yet so far, North American drillers are reluctant to buy into the first bull market they have seen in years, fearful that the weather-induced rally will not last and betting that oil output still offers a more certain return.
ConocoPhillips
"We won't be leaders in getting out there and drilling natural gas,” he said.
Call it the shale bind: with abundant supplies from shale fields such as the Marcellus in the U.S. Northeast or the Haynesville in Louisiana, there is little hope of a sustained revival in prices, and thus companies with long-term investment cycles are loathe to shift their focus. (More stories on shale oil and gas [ID:nL5N0L52JC])
The number of rigs drilling for natural gas in the United States fell by seven over the past week to 351, the lowest since 1995, according to data from oil services firm Baker Hughes.
Yet market analysts are also starting to look for signs of additional drilling that would help replenish stocks, without which prices may remain elevated for months longer. After languishing below $4.50 for years, prices surged last month to more than $5, their highest in four years.
But as the cold persists and expands, supplies are starting to strain across the country, forcing states including California and Texas to urge consumers to reduce power use to ease strain on the grid, partly because of limited gas supply.
At the end of January U.S. gas stocks fell to 1.92 trillion cubic feet, 556 billion cubic feet under the five-year average and the lowest level for this time of year in a decade, according to the Energy Information Administration (EIA).
The draw-down also shows that despite the discovery of decades' worth of natural gas reserves, the nation's energy system may not yet be robust enough to prevent the kind of unexpected shortages that have roiled the market.
The strain is so great that it now threatens to extend into 2015, according to some analysts.
Assuming that inventories are replenished at a normal rate over the summer, followed by an average winter cold season, the market may face "dangerously low" inventory levels in March 2015, BNP Paribas analyst Teri Viswanath wrote in a research note. BNP raised its 2014 price forecast by 40 cents to $4.60.
It is understandable that producers, jaded by a market that has been oversupplied for more than half a decade and busy drilling for more lucrative oil prospects, may be reluctant to invest the capital needed to boost production.
Natural gas prices peaked at over $13 per mmBtu in 2005 amid worries that North American supplies were no longer adequate to meet demand. But hydraulic fracturing and horizontal drilling technology freed massive natural gas supplies from shale deposits.
According to the EIA, natural gas production from shale fields in the continental United States rose 10 fold since 2005 to more than 30 bcf per day in 2013.
Prices have rallied occasionally, only to quickly fall again. Drillers are looking for oil now, not gas.
"We're staying the course," said Jay Averill, spokesman for top Canadian producer Encana Corp
"Seventy-five percent of our investment is going to oil and natural-gas liquids. We already have a lot of gas, too much gas."
While gas traders are starting to bid up prices for the next 12 months, bracing for tightness, there is little sign that markets believe that the shortage will last. Thanks to the discovery of shale gas, total U.S. reserves have surged by more than half to 334 trillion cubic feet by 2011.
While spot natural gas is trading at more than $4.50 per mmBtu through March 2015, beyond that prices barely top $4. <0#NG:>
