It is not a good time to be a natural gas bull it seems. Natural gas is already reducing some of the hurricane premium that it had priced in earlier. A hurricane forecaster from Colorado seems to suggest that this year's forecast will be more so ominous than those in the past. While the lingering winter has kept natural gas supported, the arrival of more spring like temperature should ease the recent rally.
Bloomberg News reported that Colorado State University forecasters predicted recently there will be nine hurricanes during the 2011 Atlantic storm season, with five of them becoming "major" storms. In all, 16 named storms are expected to develop. Last year forecasters predicted 8 "major storms" so we are seeing a reduction by three. Not that five isn't a big number, yet if you calculate the odds of these storms doing major damage to energy faculties, if Colorado is right the chances of major damage to oil and gas is significantly lower than it was a year ago. At the same time the rig counts for shale gas is at a record and the Energy Information Agency came out with another report this week showing how abundant the supplies of natural gas really are!
And I am not talking about storage. It is a small world after all and it is a world that is filled with natural gas. The EIA says that, "the use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to profitably produce natural gas from low permeability geologic formations, particularly shale formations. Application of fracturing techniques to stimulate oil and gas production began to grow rapidly in the 1950s, although experimentation dates back to the 19th century. Starting in the mid-1970s, a partnership of private operators, the U.S. Department of Energy (DOE) and the Gas Research Institute (GRI) endeavored to develop technologies for the commercial production of natural gas from the relatively shallow Devonian (Huron) shale in the Eastern United States. This partnership helped foster technologies that eventually became crucial to producing natural gas from shale rock, including horizontal wells, multi-stage fracturing, and slick-water fracturing.
“Practical application of horizontal drilling to oil production began in the early 1980s, by which time the advent of improved downhole drilling motors and the invention of other necessary supporting equipment, materials, and technologies, particularly downhole telemetry equipment, had brought some applications within the realm of commercial viability. The advent of large-scale shale gas production did not occur until Mitchell Energy and Development Corporation experimented during the 1980s and 1990s to make deep shale gas production a commercial reality in the Barnett Shale in North-Central Texas. As the success of Mitchell Energy and Development became apparent, other companies aggressively entered this play so that by 2005, the Barnett Shale alone was producing almost half a trillion cubic feet per year of natural gas. As natural gas producers gained confidence in the ability to profitably produce natural gas in the Barnett Shale and confirmation of this ability was provided by the results from the Fayetteville Shale in North Arkansas, they began pursuing other shale formations, including the Haynesville, Marcellus, Woodford, Eagle Ford and other shale's.
“The development of shale gas plays has become a ‘game changer’ for the U.S. natural gas market. The proliferation of activity into new shale plays has increased shale gas production in the United States from 0.39 trillion cubic feet in 2000 to 4.87 trillion cubic feet in 2010, or 23 percent of U.S. dry gas production. Shale gas reserves have increased to about 60.6 trillion cubic feet by year-end 2009, when they comprised about 21 percent of overall U.S. natural gas reserves, now at the highest level since 1971.”
The growing importance of U.S. shale gas resources is also reflected in EIA's Annual Energy Outlook 2011 (AEO2011) energy projections, with technically recoverable U.S. shale gas resources now estimated at 862 trillion cubic feet. Given a total natural gas resource base of 2,543 trillion cubic feet in the AEO2011 Reference case, shale gas resources constitute 34 percent of the domestic natural gas resource base represented in the AEO2011 projections and 50 percent of lower 48 onshore resources. As a result, shale gas is the largest contributor to the projected growth in production, and by 2035 shale gas production accounts for 46 percent of U.S. natural gas production. The successful investment of capital and diffusion of shale gas technologies has continued into Canadian shale's as well. In response several other countries have expressed interest in developing their own nascent shale gas resource base, which has lead to questions regarding the broader implications of shale gas for international natural gas markets.
The Wall Street Journal reports, "The North American shale-gas bonanza could be the tip of a gigantic natural-gas iceberg, according to a report commissioned by the U.S. Energy Information Administration. The report, which contains an overview of natural-gas-bearing shale-rock formations in 32 countries, estimates that these contain about 5,760 trillion cubic feet of technically recoverable gas. That is nearly seven times the amount present in the U.S, according to the report, which was released late Tuesday. The biggest overseas natural-gas shale reserves lie in China, with 1,275 Tcf. Argentina, Mexico, South Africa and Canada are also endowed with massive reserves, the report, written by consultancy Advanced Resources International Inc., said. Other countries with large amounts of gas-rich shale include Libya, Algeria, France and Poland. Each of these countries has hundreds of trillions of cubic feet of shale natural gas that can be exploited using existing technology. Independent U.S. oil companies learned to unlock the gas trapped in tight shale rock formations in the 1980s and 1990s, and the technique spread during the last decade, triggering an unexpected supply boost in North American natural gas.
“The EIA report's findings underscore how the propagation of those techniques--based on drilling horizontally in the rock formation, and cracking it with water to release the gas--could unleash a similar natural-gas supply boom around the globe. Russia, Central Asia, the Middle East, Southeast Asia and Central Africa weren't part of the study. The report also didn't take into account production costs, or above-the-ground factors such as access to resources in the countries that were studied. Major and independent U.S. oil companies such as Marathon Oil Corp. (MRO), Exxon Mobil Corp. (XOM) and Apache Corp. (APA) are already betting on the potential of overseas shale resources. So are big national oil companies like China's Cnooc Ltd. (CEO), which earlier this year struck a deal with Chesapeake Energy Corp. (CHK) to buy into U.S. shale assets; the state-run company aims to leverage the expertise acquired there toward the exploitation of China's vast shale resources."
In the mean time gas may have its last withdrawal of the season in today's weekly report! Look for a draw of 40 Bcf!
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
