Cold winter would drive natural gas prices up

11 25, 2012 by Shreveport Times

Natural gas producers hope Americans across the country keep their homes toasty this winter.

Prices must rise before earnest activity returns to the Haynesville Shale and other natural gas producing sectors. But those prices are determined by demand, and among the factors that diminished demand this year was a warm winter.

“If we don’t have a cold winter, it’s going to the same-old-same-old,” said Louisiana Oil and Gas Association (LOGA) President Don Briggs. “If we have a cold winter, that could be a game changer.”

Oil and gas firms fled the Haynesville Shale, one of the world’s largest natural gas deposits and a major driver of the northwest Louisiana economy, in droves this year as natural gas prices reached record lows. Economic activity associated with drilling fell to bare-bones staffing and proved a major blow to local economies.

In 2008, when drilling on the Haynesville Shale began in full force, Briggs said natural gas was trading at about $13 per billion cubic feet and 82 percent of all U.S. rigs were drilling for natural gas. Now the price is closer to $3.75 pbfc with more than 80 percent of rigs drilling for oil.

“The magic number is going to differ from company to company,” said LOGA Director of North Louisiana Ragan Dickens. “Things have increased to about $3.30 to $3.75 pbfc. Generally between $4 and $5 pbcf is a safe break-even point for drilling. Overall, the price is a simple supply and demand issue.”

With the advent of winter, producers are crossing their finger and saying a prayer for a cold one. Dickens said people switching on their heaters probably won’t change the supply-demand status by itself, but it’ll certainly help.

Chesapeake Energy has reduced its natural gas producing rigs to nine since prices bottomed out. The company is currently operating two rigs on the Haynesville Shale, five on the Marcellus Shale in the Appalachian Basin and two on the Barnett Shale in Texas.

The company still expects a seven-percent decline in overall natural gas production in 2013, most notably on the Haynesville Shale where production was expected to fall nine percent sequentially between the third and fourth quarter, according to CEO Steve Dixon. But he’s hopeful a change is coming.

“Winter weather patterns are shaping up to be very different than last winter’s exceptionally warm winter. Natural gas demand is growing across all sectors of consumption and coal to gas switching in the electrical generation market is proving stickier at higher gas prices than many assumed it would,” Dixon said this month in a third-quarter earnings call with company executives. “In short, after battling natural gas headwinds, driven by relentless supply growth for the past four years, we now expect to enjoy a multi-year rebound in natural gas prices driven by demand growth that is likely to be equally relentless.”

Natural gas drilling has boomed due in large part to new shale discoveries and improved techniques, like horizontal drilling, for removing the resource from deep sediment. Coupled with weak demand, LOGA’s President said 2012 has seen the buildup of a massive surplus.

“A colder-than-normal winter will dictate how much we draw on those surpluses of natural gas sitting in big tanks across the country,” Briggs said. “Replacing that surplus will be what creates demand and drives prices up.”

That supply will also be increasingly drawn on, Briggs said, as natural gas vehicles become more prevalent and electricity generation becomes more reliant on the fuel. In April, the U.S. Energy Information Administration reported natural gas-fired plants put, for the first time, as much electricity onto the grid as coal-fired plants.

“It’s just a matter of time,” Briggs said. “We are going to be moving away from oil as a primary fuel source and see more energy produced by natural gas every year.”

Louisiana is also primed to become an exporter of natural gas within the next two years, which Briggs said will also draw down on the surplus. Demand in foreign nations — like in China where he said natural gas prices are close to $12 pbcf — will also increase domestic demand for drilling.