It the early-release of its Annual Energy Outlook 2011 (AEO) report, the Energy Information Association (EIA) forecasted that the U.S. had 827 Tcf of undeveloped technically recoverable natural gas. However, a few months later the EIA revised its predictions, and now forecasts that estimated unproved, technically recoverable resources of U.S. shale gas are 482 Tcf, a 42 percent drop from its AEO 2011 projection. This reduction has led to some concern on the part of analysts in regards to the country's ability to meet future demand.
The majority of the decrease reflects a cut in the EIA's estimate for the Marcellus Shale from 410 Tcf to 141 Tcf, a 66 percent decrease. However, the EIA anticipates that, even with this cut, U.S. gas output will easily exceed consumption into the next decade. The EIA says the difference in the new numbers results from more accurate data that the agency obtained from wells in Pennsylvania in September 2011, when the state began releasing production data by individual well every six months. Prior to that, estimates were based on what companies reported in public presentations. And even at the EIA's estimate of 141 Tcf, the Marcellus Shale is considered to be the world's second or third largest gas field.
The combination of horizontal drilling and hydraulic fracturing technologies has made it possible to produce shale gas economically and, in most cases, at costs that are below the cost of most conventional wells. Not only that, but production costs are continuing to fall. Shale gas potential is huge and has dramatically changed the natural gas industry. Never before has the U.S. had the ability to produce so much natural gas so quickly and at such attractive rates. As Energy Solutions, Inc., further analyzes in its recent Natural Gas Price Outlook, shale gas has truly been an industry game-changer.
However, it is important to recognize that shale plays vary dramatically from one to another as they have been exploited at different times, are different depths, and contain different amounts of natural gas liquids (which impact overall economics). For example, the Haynesville Shale was one of the main drivers of U.S. natural gas production growth until just recently. Now, as that region is maturing, producers in that region are shifting their focus from high initial production rates to improving their long-term decline rates and ultimate recoveries. Similarly, production in the Barnett Shale is only about one-third of where it stood in 2008. However, declines in these two regions are projected to be made up by gains in the rampant Marcellus Shale, particularly given the potential for the Utica and Devonian stacked plays. Additionally, new technologies are expected to improve the economics of accessing such "stacked plays," which are additional recoverable shale plays that exist within an existing shale play.
Even with anticipated increased demand from coal-to-natural gas fuel switching, anticipated seasonal weather-driven demand, growth in the industrial sector, and additional transit and public service vehicles switching to being powered by natural gas, there are no concerns over meeting increased demand in 2012 and 2013. In fact, there are really no concerns in meeting natural gas demand into 2015.
However, the implementation of stricter emission regulations by the Environmental Protection Agency, combined with the exportation of liquefied natural gas (LNG), is ultimately expected to create permanent shifts in the demand for natural gas. These shifts, along with the rebirth of the manufacturing industrial economy, will cause demand to finally catch up with supplies at some point in 2015. Thus, the picture in 2015 is very different from the one today, as demand could once again place some strains on natural gas supplies, causing natural gas prices to rise.
Overall, investors looking for a natural gas price rebound in 2012 may be very disappointed. With natural gas storage inventories at more-than-adequate levels there is little reason for natural gas prices to rally. As a result, price rallies that do occur are expected to be nothing more than short-term corrections in a larger bear trend.
This summer, natural gas prices may show some strength if monthly natural gas production reports exhibit signs of production declines. However, such declines are expected to be overshadowed in the fall of 2012 as low natural gas prices, along with a lack of storage capacity and limited market demand, create an environment that will likely result in larger-scale mandatory production curtailments. Mandatory shut-ins of production are very bearish for physical prices because it sends a signal to the short-term market that there is more supply than there is demand. And if physical prices are weak, the front-month natural gas futures prices will likely weaken to new calendar-year lows.
Additionally, a quick price rebound from such a new low is unlikely. Producers are looking for opportunities to hedge their forward production prices for 2013 and beyond, so any major price strength will undergo a surge of selling from producers; such selling will continue to place a cap on upward price moves.
In summary, natural gas prices are likely to reach a new calendar-year low in the fall of 2012, before gravitating higher into 2012 and beyond. However, it is important to remember that even as prices rise there is still more-than-sufficient production available to meet growing demand. As a result, the upward natural gas price move is expected to be very gradual, rising just $.50-$1 per MMBtu each year into 2015.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.