Glut in Natural Gas

Today’s low natural gas prices are the result of a glut of wells drilled in the 2000s in response to what were then high prices, according to a Houston-based energy investment expert. That cycle will reverse as those new wells deplete and drilling activity slows in response to today’s lower prices.

Raoul LeBlanc of PFC Energy, in a speech to the CFA Society of New Mexico last week, said he expects natural gas prices to be from $4 to $5 per million British thermal units (Btus) this year and next, then rise to about $7.50 in 2014 through 2016. Recent gas prices have been below $3.

In the 2000s, “money was pouring into” natural gas exploration and production companies, LeBlanc said. “They were looking for something to do with it.” Companies began developing new technologies that would allow them to extract gas from previously unusable geologic formations and began finding gas in those formations.

“It’s like a party followed by a hangover,” LeBlanc said.

The new fields opened in North Dakota, north Texas and Pennsylvania have been very productive, in part due to the use of fracturing chemicals that allow gas to escape from rock formations. The number of drilling rigs looking for gas has dropped from 1,600 a few years ago to 800, but production continues to be up “because they continue to drill some really good wells.”

Baker Hughes reports that as of last week, 81 drilling rigs were active in New Mexico. Operators in the state produced 1,047,302,189 thousand cubic feet of natural gas last year, and 57,729,704 barrels of oil, according to the state Oil Conservation Division.

However, well productivity declines every day as gas is removed. One operator in North Dakota’s Bakken operations has seen the productivity of its wells decline 80 percent in the past seven years. At today’s prices, companies are willing to bring in only the most productive new wells, since the cost to drill a good well is about the same as the cost to drill a bad one, and a good well can be 10 times as productive as a bad one, LeBlanc said.

That means drilling activity is slowing. The combination of declining productivity and less exploration will set the stage for the next cycle of rising prices, LeBlanc said.

Some companies are hoping to export liquefied natural gas to places like Japan, where gas sells for $15 per million Btus. LeBlanc said a number of LNG terminals are expected to open on the West and Gulf coasts of the United States. Mexico is expected to become a big importer of American natural gas because its demand for gas-generated electric power is increasing and Mexico’s domestic gas supply has been declining for the past seven or eight years.

Mexico is planning an $11 billion investment in infrastructure to bring gas into the country, LeBlanc said.