With natural gas, looking ahead means looking back
By Brandi Cowen
The last year has been a rather interesting one in the natural gas market, with pricing dropping to incredible lows and storage hitting new all time highs.
This has prompted a significant increase in the number of discussions surrounding the fuel, with government, oil and gas companies, and private citizens all taking different approaches to the boom in shale gas drilling – the primary driver of the major changes to the natural gas market.
Natural gas companies tout the fuel as a low carbon, highly accessible fuel alternative to coal. While this is true, members of the communities where drilling is taking place are concerned about the environmental impacts of hydraulic fracturing. With significant methane leaks possible, pollution in the surrounding ground water and the potential for seismic activity, there are still many side effects that have not been documented thoroughly. This has raised concern in most communities. The U.S. government is looking to natural gas to be a bridge fuel: a way to work towards lower carbon emissions, move towards energy self-sufficiency and keep people employed throughout the country.
Despite these varying viewpoints, there are several changes that have taken place that do not appear to be leaving the marketplace any time soon. With the boom in shale gas drilling, natural gas supplies in the U.S. have been at all time highs. This has decoupled the pricing of natural gas from crude oil. Drilling is no longer dependent on traditional rigs, which used to be the primary pricing driver. Now weather and storage are the two key focuses for traders, with hurricane season taking more of a backseat than ever, as the majority of gas for the U.S. is no longer being produced in the Gulf of Mexico. This major shift in supply has completely turned the market on its head, at a time when our climate appears to be changing as well. With no winter to speak of last year in the key consuming regions and cold weather yet to make a real appearance this year, many are wondering where and when the cycle of high storage figures leading to dramatic drops in pricing will end. This may well become the new normal over the course of the near future (a three to five year timeframe), until time passes and the viability and sustainability of shale gas wells can be proven, or moratoriums on shale gas drilling become more prominent due to environmental concerns.
Current proved reserves are expected to last 40 years for the shale gas plays in the US. That being said, there has not been enough time yet for many of these wells to actually show this will be the case. If reserves do not hold up for that length of time, the estimates that governments, natural gas companies and market participants have been using for future forecasting and planning will have to completely change once again. In the meantime, expect to see low natural gas pricing through the coming 12 months, as production remains steady and storage remains in a very strong position. Even with normal winter temperatures being forecast beyond the midpoint of January, we do not expect to see a rise in pricing beyond $3.50 and $3.75 CDN/GJ through 2013 for the spot market, as there will not be enough of a winter to depreciate storage to a point of concern before the injection season starts. Storage is currently sitting at a surplus to both last year (the previous all time high) and the five year average, along with relatively steady demand figures – a very telling sign we have more than enough supply to meet demand and keep any potential dramatic price increases at bay.
Lisa Brodeur is a quality assurance supervisor with 360 Energy.