2012 January 13

The Master Resource Report  2012-01-13

Who is swimming without a suit?

With natural gas prices now well below $3 and futures prices coming down fast it won’t be long until the E&P industry finds out who is over extended. Shale gas may truly be a “game changer”; these low prices will soon determine who can even stay in the game.

What a difference a few years makes!

Back in 2003 and 2005 then Federal Reserve Alan Greenspan had some interesting things to say about the price of natural gas. Now nine years later they seem a little silly given that Asian LNG (liquefied natural gas) is selling at more than 5 times U.S. prices and the debate is on about the U.S. exporting LNG not importing.

Testimony of Chairman Alan Greenspan, Natural gas supply and demand issues

Before the Committee on Energy and Commerce, U.S. House of Representatives, June 10, 2003

“In recent months, in response to very tight supplies, prices of natural gas have increased sharply. Working gas in storage is currently at very low levels relative to its seasonal norm because of a colder than average winter and a seeming inability of increased gas well drilling to significantly augment net marketed production. Canada, our major source of imported natural gas, has had little room to expand shipments to the United States, and our limited capacity to import liquefied natural gas (LNG) effectively restricts our access to the world’s abundant supplies of gas.”………

“Improved technologies, however, have been unable to prevent the underlying long-term price of natural gas in the United States from rising. This is most readily observed in markets for natural gas where contract delivery is sufficiently distant to allow new supply to be developed and brought to market. That price has risen gradually from $2 per million Btu in 1997 for delivery in 2000, and presumably well beyond, to more than $4.50 for delivery in 2009, the crude oil heating equivalent of rising from less than $12 per barrel to $26 per barrel. Over the same period, the distant futures price of light sweet crude oil has edged up only $4 per barrel and is selling at a historically rare discount to comparably dated natural gas.”

Remarks by Chairman Alan Greenspan before the National Petrochemical and Refiners Association Conference in San Antonio, Texas on April 5, 2005.

“The larger question, of course, is what will increased world trade in LNG and expanded U.S. import capacity do to currently uncompetitive natural gas prices in the United States? During the past couple of years, when U.S. prices of natural gas hovered around $6 million Btu, import prices of LNG in Europe have ranged between $2 and $4 per million Btu, and those in Japan and Korea have generally been between $3 and $5 per million Btu. Estimates of production and delivery costs of LNG to North America appear to hover around $3 per million Btu. In the short run, exporters to the United States are likely to receive our domestic price, currently above $7 per million Btu. But unless world gas markets tighten aggressively, competitive pressures will arbitrage the U.S. natural gas price down, possibly significantly, through increased imports.”

What will we be looking at in energy in 2020 and asking how could we have been so wrong?