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The Coming Unholy Alliance In Natural Gas
Wolf Richter www.testosteronepit.com
Natural gas traded at $3.22 per million Btu (MMBtu) at the Henry Hub on Monday, a seven-month high, and a jump of 69% from its April low. Breathtaking when you think that a few months ago, the doom-and-gloomers, who’d been right for a very long time, were predicting chillingly that the price would hit zero by the fall, when storage would be full and excess production would have to be flared. But the pains for the industry are far from over.
Natural gas spot prices can spike locally due to transportation constrains and demand conditions. Earlier this year, while Japan paid $17/MMBtu, New York $12/MMBtu, and Boston $9/MMBtu, prices at the Henry Hub, which is in southern Louisiana, marched towards their decade low and dropped below $2/MMBtu [for that phenomenon, read.... The Natural Gas Massacre And The Price Spike].
Conversely, there are regions in the US where natural gas prices lag behind those at the Henry Hub. A salient example is the daily spot price at the Tennessee Gas Pipeline (TGP) Zone 4 Marcellus, a hub that serves part of the vast Marcellus formation that extends across much of Virginia, Ohio, Pennsylvania, and New York.
Drilling by horizontal fracking has been phenomenally successful in this shale formation. In Pennsylvania, production of dry natural gas in June has doubled over last year, reaching 5.7 billion cubic feet per day—9% of overall US production. But it outstripped the take-away pipeline capacity, despite new pipelines that entered service in 2011 and added 1.5 Bcf/d in capacity. As a consequence, according to Bentek Energy, over 1,000 natural gas wells in northern Pennsylvania are not yet producing natural gas because of pipeline constraints.
With production outrunning pipeline capacity and creating a local glut, spot prices have separated from those at the Henry Hub. At the TGP Zone 4 Marcellus, starting in May, prices fluctuated widely and dipped below $1/MMBtu even has prices at the Henry Hub had started their track towards $3 MMBtu.
Producers in that region are hurting even more than elsewhere. The 1,000 wells that have been drilled but aren’t producing and cash-flowing yet are a drag on the companies that own them. And wells that are producing have had to sell their unhedged production at a discount to already depressed prices that remain below the cost of production in most of the nation. So the natural gas massacre hits northern Pennsylvania with even greater violence.
Rig count is a good indicator of the health of the drilling industry, and also of the direction of future production—though there is a considerable lag between the number of rigs drilling for gas and actual production of gas. And the rig-count is beginning to be worrisome. At 505 rigs as of July 27, the count is down 46% from October last year, and hit the lowest level since July 1999.
Somewhere between 700 and 900 rigs might be required to maintain current production levels, given the sharp decline rates of horizontally fracked wells (up to 90% over the first 12 to 18 months). These wells will then have to be refracked, or new wells will have to be drilled to make up for the declines—at an additional cost. An eternal rat race. But the hard-hit industry is stepping away from drilling for dry natural gas; drilling at today’s prices is still a losing proposition. Those that can have switched to drilling for oil and natural-gas liquids (priced similar to oil), which are profitable. Of the natural gas rigs in operation—fewer and fewer every week—an increasing number are focused on plays that contain more liquids and less dry natural gas. It’s how producers hope to survive.
Turmoil and financial stresses may further reduce drilling activities—though it seems unthinkable that the rig count could fall even further! Record demand is eating up the remnants of the glut. Supply appears to be leveling off and will eventually follow the rig count down. If that happens during heating season, when seasonal demand skyrockets, it will be an unholy alliance. We have seen violent spikes before. And we will see them again. It’s the nature of the business.
In the great natural gas shakeout, less efficient or poorly capitalized producers may get wiped out. It’s capitalism’s creative destruction. But the price of natural gas has been below the cost of production for so long that the damage is now huge. Read.... Natural Gas: Where Endless Money Went to Die.
And Malaysia’s state-owned oil and gas company plunked down $5.5 billion for a foothold in the Canadian shale gas scene—even though the odds of securing permission to export LNG are poor, the costs of such an endeavor immense, and the timeline very long. Read.... The International Race for Energy Resources Just Got Hotter.
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HINT: Enron
Watch what First Wind/UPC wind management is up to and who is involved... Stay tuned.
"securing permission to export LNG are poor..."
I don't think so, everything in Canada is foreign owned. The gov't makes a big show sometime but they dont and never have cracked down on an entity owning public stock or anything close.
Majority of oil sands ownership and profits are foreign
http://business.financialpost.com/2012/05/10/majority-of-oil-sands-owner...
http://www.newswire.ca/en/story/972231/data-from-bloomberg-reveals-that-...
http://www.canada.com/business/2035/Majority+oilsands+ownership+profits+...
http://www.afl.org/index.php/May-2011/who-owns-our-oil-sands-foreign-cor...
A lot of these guys don't export and spend the extra to ship it because in their own country they already have it, what they do is use that LNG as a physical hedge aginst their coal or LNG/oil assets or convert to electricity to sell into the local market if electricity prices are higer than the cost of making that electricity from coal or nat gas.
Called the crack spead when refining oil or energy arb'ing.
Just give somone like ObamaGas/JPM a 50 year monopoly to build infrastructure for re fueling stations with a 12% return on investment and I bet we would have a new booming economy with in 2 years.
This sounds like the HOPE setting is on 11.
Too bad the common good is fucking dead with Uncle sam's boot on it's throat and big money paying for your oppression..
Face the music, fixing this mess and solutions are just not profitable for the faggots in charge.
If you ain't big and incronyiated you can go fuck yourself!
In the 70's, after the OPEC oil shock and rationing in America, the solar business started taking off. Solar hot water heaters were becoming pretty common. Insulation, weatherstripping, and a whole host of other products were beginning to have an affect on energy consumption.
This was driven in large part by tax credits and government support of these new industries, with a goal of energy independence.
About 15 minutes after Reagan was elected in 1980, all the tax credits were phased out and the whole energy independence concept was quietly put back in the box. It was somewhat like the Bush adminstration telling us to go shopping while we cut taxes and fought 2 wars off the books. Just think how far along we may be if we had continued on a serious National policy of energy effeciency.
Deliberatly bankrupting America? Decide for yourself, but I know this country has been sold down the river. I have been paying too much attention for far too long to be fooled. Not that I can do much about it, but make no mistake...TPTB have zero allegience to any particular country, only to mammon.
venezuala oil sector to partner with argentina and brazil??
http://www.bernama.com/bernama/v6/newsworld.php?id=684339
all i'm saying is that the russians hsould be helping argentina get the falklands back. if they don't they're dumb. it's a smart move for them to instigate shit. it works on so many levels. the spanish are broke. they cannot do shit about ypf nationalization, the next big thing is for china and russia to help nuetralize british oil company dominion off argenitine coast.
submarine warfare anyone!?
So rig count is down, but there at 1,000 rigs standing by not producing as of yet? So basically we are finding the floor, around $3, but those 1000 rigs will put in a ceiling. alhouthg pipeline contraints should mean the ceiling won't be in play for a few years.
I imagine the floor traders who have to trade this stuff for a living are very good at what they do.
Prompt month is up 69%. September 2012 contract is up 25%.
Stop posting this garbage, ZH. It's QC time for the contributors.
I'd be happy to see a Kotex and Testosterone warning on RSS feeds.
I'd say I find it strange to see production outracing pipeline capacity to such a degree, but then, all I have to do is to think about the word malinvestment, and recognize it's ultimate source, Benron.
I really, really don't understand. 10-15 years ago I was so sure that by now half of the US truck fleet would be on natgas. I'm clueless why this is not happening and I would seriously appreciate a hint...
Been watching a lot of Canadian Business TV the past few years. Seen several reports of large truck manufacturers increasing production of natgas rigs. Also, UPS supposedly has installed natgas filling stations to service their routes around SoCal to Utah. Also, Encana announced a plan to install natgas service stations along a few major highways in Canada...not sure how far they've progressed on that project. Sorry, doing this quickly from memory...no links.
Compression of the gas, we have little capacity in this department. Takes a lot of energy to compress it, maybe that would be a good use of windmills...
Infrastructure cost, low btu/m3; LPG/NGL is a better option for truck rather than compressed NG. USA should have gone deep into Coal to liquid fuels as of 1982, when they stopped. It would have created the basis of a syn fuels industry like Sasol did in S.Africa. Gas is best for electric power generation and petrochemicals.
Manipulation of the markets and political will is what is keeping nat gas from being utilized as transportation fuel. It will be used for that purpose when the big boyz say it gets used, if ever.
Because the glo-bull-ist game is to continue the wealth transfer via the more expensive products such as oil. Whatever doesn't make sense to you, probably makes cents to them. They are dirty rotten bastards, that's why.
You just don't get it.
It might have started with Bush Sr, but it accelerated under Clinton. The US is selling itself to the Chinese. It might have something to do with the Bilderburg Group or all of that other world government conspiracy. But consider this:
1) the Chinese are buying all of the oil worldwide,
2) The Chinese are selling US Treasuries,
3) The Chinese have a vast supply of rare earth materials - I will concede a large lithium supply in Chile,
4) The Chinese are building all of the solar panels,
5) The Chinese are building all of the windmills, etc, etc, etc
Now to my real point,
The US postal service - yes that postal service - is commited to building an all electric/battery storage automotive fleet. I am saying this with a straight face. I have attended Congressional hearings where postal representatives state that they can use the batteries to balance/stabilize the electricity grid. This stabilization is only needed during the day when the vehicles are disconnected of course.
So you see, if we had been smart and gone to NG, then we wouldn't have inflicted damage upon ourselves at the rate required of our Chinese overlords and we wouldn't have been strengthening the Chinese economy with our purchases of their rare earths. Does it make sense now? It is all about enslaving the US to the Chinese.
There might actually be a silver lining for the post office. As it implodes this week, they might be able to sell the postal car batteries to the Indians who are currently experiencing a blackout of 600 million people. The Indians are smart. They will charge the batteries at night and leave them connected to the grid during the day to power things other than antediluvian postal trucks. I mean - what does the USPS do besides deliver junk mail. The Indians probably never had junk mail. Probably started life with eMail and never knew the old ways.
Here's another way to look at the process:
1. The US govt sells govt debt to China that becomes worth less every year the Chinese hold it. US citizens buy manufactured goods from China with US dollars that are worth less every year the Chinese hold on to them.
2. The US govt takes the money from the Chinese and builds military bases and ships that surround China and Russia.
3. The Chinese desperately want out of this trap, but neither the US nor Canada will let them exchange those US dollars for oil or other resources in North America (look at how the current Chinese attempt to buy Nexen is now stalled). So the Chinese buy gold and silver from wherever they can and buy other resources from South America and Africa.
On paper, the Chinese own the US. In reality, what they'll collect on those IOUs is probably a lot less than they thought they would collect.
Also, "freeing" Libya was an excercise in undermining China's attempt to buy and control one of the world's largest sources of light, sweet crude. And "freeing" Syria has the added (or primary) benefit to the US of forcing a Russian naval base to close down in that country. To a large extent, the Chinese (unintentionally) are funding these US military adventures in this oil-rich area. What's the over/under on how long we allow Brazil to deal resources directly to China?
Don't worry bout the USPS. Do you really believe the U.S. Govenrment would let them go Tango Uniform before a presidential election?
Not going to happen, another bailout coming right up. More can-kicking, the #1 olympic sport.
I am baffled as well, Ghordius.
In Lima, Peru, a large segment of the taxi fleet runs on compressed NatGas, these would be small cars. Running on NatGas is cheaper than gasoline my in-laws tell me.
It does seem indeed that certain segments of the US fleets (municipal fleets, the large truck fleet (at least the ones driving on our Interstates) and other low-hanging fruit) would be obvious candidates for switching to NatGas.
I guess the problem is no one wants to pay for the infrastructure (putting NatGas at the gas stations). But, they overcame that problem in PERU!
oh, thanks. so I'm not the only one thinking that those humungus trucks driving containers from coast to coast would be the natural "low hanging fruit" of natgas in the US.
http://us.incruit.com/CNG-jobs
http://www.lngworldnews.com/usa-gfs-corp-introduces-lng-conversion-system-for-mine-haul-trucks/
http://www.ttnews.com/articles/basetemplate.aspx?storyid=26165
http://www.ngvglobal.com/truck-and-engine-manufacturers-takes-lead-on-alt-fuels-in-australia-0903
http://news.yahoo.com/gfs-corp-announces-first-commercial-lng-conversion-system-080228222.html
Infrastructure. You cannot just pull into any Flying J, or Loves, and get natural gas. And the cost of doing that all the way across the country, from the east coast to the west, would be high to say the least. Oil is still the best energy deliverer out there, and until that gets scarce, it's highy unlikely we'll see natural gas take over to any degree.
I have a natural gas pipeline right to my house. Infrastructure is NOT a problem.
Don't worry, local governments are getting sucked into the infrastructure game, buying a handful of natgas vehicles in order to get some Uncle Sugar money and get their name in the news for being progressively green.
My guess is they'll get fully invested in the system just about the time we pass the production cliff.
hint..
Serious progress in any domestic fossil fuel effort diminishes the mandate to protect the global free flow of oil at market prices… and the type of military it takes to do so.. and the political impositions required.., and the primacy of the petrodollar.. and the control by the elite of the issues and the farm.
1) The oil industry rules the country (and congress).
2) Infrastructure would be built if Nat Gas were profitable.