The surprise Northeaster blowing across the eastern United States may have confirmed the final bottom for hibernating natural gas and coalbed methane [CBM] company shares. The winter storm followed this past Tuesday’s Energy Information Administration [EIA] ‘Short-Term Energy and Summer Fuels Outlook.’
The EIA forecast higher natural gas prices, this summer, while spot WTI crude oil prices are expected to decline. “On an annual basis, the Henry Hub spot price is expected to average about $7.83 per mcf in 2007, an 89-cent increase from the 2006 average, and $8.11 per mcf in 2008.” The EIA expects summer 2007 natural gas prices to rise by 17.7 percent over the past summer. For this year, natural gas prices would increase by 12.8 percent over 2006.
The statistical arm of the U.S. Department of Energy cited, “Concerns about extreme weather conditions and rising prices in the oil market will keep upward pressure on the Henry Hub spot price during much of the forecast period.” The report pointed out that “electric power demand for natural gas increases during the summer cooling season.”
By the third quarter the EIA expects, “The trend will accelerate during the height of the cooling season.” The rest of 2007 bodes well for CBM and natural gas investors because spot prices are again forecast to begin a “climb toward a winter peak.”
The National Oceanic and Atmospheric Administration projection for heating and cooling degree days indicates an increase of 8.4 percent more residential consumption of natural gas during summer 2007. According to the EIA, there will be 11 percent more ‘gas –weighted heating degree days’ this summer.
On March 30th, natural gas storage levels stood at 127 Bcf below the comparable level a year ago. Last year’s storage surplus clobbered many of the CBM hopefuls in late spring and through the summer. This year, the storage story has begun to reverse. This weekend’s bad weather could result in another drawdown, and CBM company shares could jump a bit higher – as was seen in mid winter.
Coalbed Methane Stocks in Play Again?
In late January, BP set the pace for renewed interest in coalbed methane [CBM] by announcing it planned to invest $2.4 billion over the next 13 years to increase its share of ultimate recovery of coalbed methane gas from the San Juan Basin by an estimated 1.9 trillion cubic feet. BP (NYSE:BP) spokesman Tony Hayward said, “This investment will allow us to continue the responsible development of one of the largest gas fields in the US.”
It is quite possible the unconventional gas companies could turn around during the EIA-predicted strengthening in natural gas pricing. Therefore, we are revisiting and more closely monitoring developments in previously featured companies with non-conventional gas assets. The more speculative coalbed methane exploration and development companies appear to offer more leverage under this pricing climate.
Calgary-based EnCana (NYSE:ECA) is the industry leader in unconventional natural gas and integrated oil sands development. As of December 31, 2006, the company had net proved reserves of approximately 12.4 trillion cubic feet of natural gas.
Denver-based Delta Petroleum Corporation (DPTR) engages in exploration for, and the acquisition, development, and production of natural gas and crude oil. Core areas of operation include the Gulf Coast and Rocky Mountain regions. What some believe could become a company-maker is the Columbia River Basin in eastern Washington. Delta has recently divested non-core properties to narrow the company focus. Gulf Coast is about conventional oil and gas, while the Rocky Mountain focus is on non-conventional tight gas sands.
The smaller, more speculative Alberta-focused coalbed methane companies include Ember Resources (OTC:EBRRF), Mahalo Energy (MHLOF.PK) and Rockyview Energy. These have been among the hardest hit since a gas storage surplus was announced in June 2006. The collapse of the Amaranth hedge fund, a few months later in September, washed out much of the intense speculative interest in the sector. The loss of about $6 billion natural gas futures in a single week deflated bullish investors. Also, the absence of a hurricane season in 2006 eliminated any urgency to rush into the nat gas sector.
Bottom fishers have been quietly accumulating waiting for the underlying commodity to regain momentum. We observed companies issuing positive news releases in late March, after initial cold weather had provided them with some share price support.
On March 30th, Ember Resources announced an estimated of 257.4 Bcf of ‘confirmed CBM gas resource. Also in late March, Mahalo Energy sold off its non-core oil and gas assets to focus on its CBM properties. Again, in late March, Rockyview Energy [TSX: RVE] announced it had drilled 28 wells in Alberta’s Horseshoe Canyon, and is in the process of drilling another well in the Manville Formation. We found these Alberta, Canada CBM plays were one method of gauging the direction of this sector.
Others which follow the direction of the Alberta CBM plays are three companies, focused on CBM development in China. We’ve featured these in the past because China is transitioning its energy mix. The country is calling for a doubling of its natural gas consumption to 6 percent, while reducing its dependency upon coal for electricity production. The International Energy Agency indicates that China’s gas demand by 2010 could reach 100 billion cubic meters per year.
Earlier this year, Far East Energy (FEEC) reported high gas content and permeability from its initial wells in the company’s Shouyang Block in China’s coal-rich Shanxi province. Cautious comparisons have been made to the potential of prolific wells found in Australia’s Fairview Field and the San Juan Basin in Colorado-New Mexico. One of the keys to CBM development is permeability, which allows the gas to move with greater ease through the coal formation and across longer distances to the well.
Pacific Asia China Energy (OTC:PCEEF) has encountered similar results at shallow depths – high gas content with permeability. It is expected to commence a three-well pilot-testing program on the company’s Baotian-Qingshan CBM concession, known as the Guizhou project. What separates this company from so many of the other speculative CBM plays is the cash cow presently being developed with its joint venture drilling subsidiary. In mid February, the company announced it was awarded a contract with a unit of the world’s third largest coal producer in excess of $7 million. In essence, Pacific Asia China Energy is also heading down the road of also becoming a drilling company. The subsidiary has an exclusive in China for the Mitchell Drilling Dymaxion technology.
Hong Kong-based Green Dragon Gas [AIM: GDG] reported success drilling efforts in late January in each of the company’s five CBM blocks in China. Forty-seven wells were drilled in record time through the target coal seams with 26 drill rigs working concurrently at the peak of the drilling. Green Dragon announced it would submit its most advanced CBM block to the pertinent authorities by the end of the recent quarter to become its first ODP (Overall Development Program). Success in this effort would likely boost the others in this space.
Coalbed methane and other unconventional energy ideas play an integral role for the ‘peak oil’ adherents. Abrupt climate change and global warming episodes are becoming more common. It is no surprise the pass we got in 2006 with the absence of severe hurricane activity was anomalous and unlikely to repeat this summer. The number of force majeures in mining metals has crept higher in 2007 – and not just the cyclone-induced mine flooding at Australia’s ERA uranium mine.
We’ve following unusual developments in the Arctic (and elsewhere) which are suggestive of more climate change to come. For example, Inuit elders are now complaining of the increased exposure to ‘sunburn.’ The largest increases in UV radiation occur in the spring, and this generation of Arctic dwellers may be exposed to 30 percent more UV radiation than their elders. Heat-trapping greenhouse gases may be warming up the North Pole at an accelerated rate.
With this in mind, the battle is on to reduce the amount of coal-burning in power plants. The immediate logical solution is an increased reliance on natural and unconventional gas. The faster the political momentum swings to reducing coal-fired plant expansion, the sooner this could impact natural gas pricing. Under these circumstances, the unconventional gas companies, CBM and otherwise, should benefit.