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  • U.S. Shale Gas Producer Squeeze: No Pricing Power, Heavy Capex and High Debt 0 comments
    Feb 7, 2011 6:19 PM | about stocks: CHK, XTO, RRC, KMI, WMB, APA, APC, XOM, CVX, BP, MRO

    We have previously advised that the substantially depressed domestic natural gas prices due to excessive supply, producers simply can't make the math work. When you combine the leasehold costs, drilling cost, transportation commitments against the wellhead prices received, producers can't carry.

    If you can't pass on your capex and debt costs to consumers, you are drilling for a fraction of your variable cost and deferring "actual losses" through a variety of off balance sheet and on balance sheet accounting tools.

    There is not going to be any salvation in "instantaneous exports of Natural Gas" from the U.S., there will not be any sudden sustainable price spikes, and there won't be any sudden incremental and sustainable demand from automobiles, trucks, etc.

    Thus, the next 3-5 years for U.S. domestic natural gas producers looks very grim, despite how much we like NG and support its implementation.

    Gas Profit at 7-Year Low(Bloomberg) -- The returns for buying natural gas this spring and selling it for use next winter have dropped to the lowest level in seven years, discouraging companies from building new storage sites in the U.S. and threatening to put excess supplies on the market.

    Buying gas for April delivery and selling more expensive November futures yielded 35.7 cents per million British thermal units yesterday on the New York Mercantile Exchange, the lowest premium for the day since 2004. The gap was 72 cents a year ago. Increased storage is needed to accommodate additional gas supplies as production from shale formations increases.

    About 42 billion cubic feet of storage capacity is under construction this year, down from 99.7 billion built in 2010 and 124 billion in 2009, according to Bentek Energy LLC of Evergreen, Colorado. As much as 200 billion cubic feet of new storage may be needed this fall, said David Pursell, a managing director at Tudor Pickering Holt & Co. in Houston.

    "Natural gas prices are not looking so exciting and this makes it difficult to make the economics work for storing gas and assessing building new facilities," said Michael Carter, a director of SNL Energy in Boulder, Colorado, which collects and disseminates energy industry information.

    Gas for delivery in April rose 0.8 cent to $4.508 per million Btu yesterday in New York. November futures traded at $4.865. Gas for delivery in February, the front-month contract on the exchange, gained 1.8 cents to $4.491.

    Canceled Projects

    Gas storage and pipeline projects with total capacity of 58.7 billion cubic feet have been canceled or postponed, according to SNL, a unit of SNL Financial. There are about 400 gas storage sites in the lower 48 states, mostly in depleted underground gas or oil reservoirs, according to the Energy Department.

    "Right now the gas curve is very flat and there is not a lot of impetus to build new storage facilities," said Matt Marshall, an analyst at Bentek based in Evergreen. "It's possible that in late 2011 we will approach or break storage limits and prices will fall to near $3."

    Some gas companies also canceled new storage construction plans as demand weakened during the economic crisis. Piedmont Natural Gas Co., a Charlotte, North Carolina-based gas distributor, said in April that it was putting the Robeson liquefied natural gas storage project in the state on hold indefinitely.

    "The rate of customer growth has certainly slowed as the result of the economic recession," David Trusty, a spokesman for Piedmont, said today in a phone interview from Charlotte.

    Storage Fees

    For short-term gas speculators who bet on futures spreads between spring and winter, storage companies can charge a fee equivalent to as much as 70 percent of the spread, according to Randy Brown, managing partner of Fort Worth, Texas-based energy consultant Tremont House Energy.

    "Storage companies are very aware of speculative arts," Brown said. "In order to make the math work for speculators, the spread has to be big enough."

    The amount of storage capacity that might be needed this fall may rise to 4.2 trillion cubic feet, according to Pursell. Only about 4 trillion cubic feet of storage may be available, based on Energy Department estimates of demonstrated peak capacity. Stockpiles rose to a record 3.84 trillion cubic feet on Nov. 5.

    U.S. gas production in 2010 may have climbed to 61.59 billion cubic feet a day, the highest level since 1973, according to Energy Department estimates.

    Shale Gas

    Shale-gas output rose 47 percent to 3.11 trillion cubic feet in 2009 from a year earlier, department figures show. Shale-based supplies accounted for 14 percent of total marketed gas production in 2009, compared with 10 percent in 2008 and 6.4 percent in 2007. Gas production from shale formations may double by 2035, department projections show.

    "Because some shale gas production, such as Marcellus gas, is so close to the markets, shale gas is making people think twice about how they use storage: Do I really want to invest all this money in the storage facilities" when consumers can get gas straight from the fields, Carter said.

    The Marcellus field has gas deposits in West Virginia, Pennsylvania and New York, near the biggest population centers of the eastern U.S., according to the Energy Department.

    Gas inventories may total 1.774 trillion cubic feet by the end of March, up from 1.662 trillion a year earlier and the highest level ever for the end of the heating season, according to Energy Department estimates.

    Gas storage may rise above 4.1 trillion cubic feet by the end of the injection season, said Cameron Horwitz, an analyst in Houston at Canaccord Genuity.

    "If, in fact, you fill up the storage facilities, gas prices may collapse and you are basically forcing producers to shut in their production or reroute gas to somewhere else," Horwitz said. "With the gas rig count above 900, it's unlikely that gas production will fall significantly this year."

    The number of gas drilling rigs operating in the U.S. totaled 906 in the week ended Jan. 21, up 8.8 percent from a year earlier, according to Houston-based Baker Hughes Inc.

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