Natural Gas Price Outlook – What's the Play?
The natural gas market’s underperformance in the investment world hampers its current role as (at least an investment) alternative to crude oil, effectively making the abundant fuel take a backseat.
The biggest hurdles for gas production and consumption to become as ubiquitous as that of oil or at least as profitable were recently outlined by Mickey Fulp, who calls himself the Mercenary Geologist, which I’ll summarize below:
- Supplies: Abundant. (And often re-exploited on top of existing wells.)
- Risk/Reward: Natural gas’ development play requires low risk venture capital.
- Transportation: Natural gas is difficult to transport, needing dedicated pipelines to the wellhead. This infrastructure is sorely lacking.
- Storage: Difficult. Must be stored in underground caverns in gaseous form; liquid form is better to store, but proper liquefaction facilities are unavailable/inadequate.
- Processing Capacity: Insufficient in the US.
- Power Plant Capacity: Most domestic plants are coal-fired; retooling them to use natural gas is burdensome and expensive. Also, even though natural gas burns far less CO2 than coal, its main component methane is a bigger culprit behind greenhouse gas emissions.
- Environmental Opposition to Drilling, Transportation, Processing, and Storage: Almost self-explanatory.
- Land Access: “The federal government owns nearly 30% of the country’s land where an estimated 40 percent of potential natural gas resources exist. Adding in federal offshore waters ups this resource figure to almost 60%.
But as demand of natural gas begins increasing, especially in quickly growing economies such as China’s (which my colleague Stuart wrote about in a July 7 post), the price may follow, and if increased prices indicate any sort of sustainable trend, then that will spur investment to build up production infrastructure.
Indeed, here in the US, the fracking process a primary method of extracting natural gas by injecting water and chemicals into the rock that contains it has been under fire for years; but potential production may soon climb astronomically.
Will Natural Gas Prices GrowÂ¦or Not?
Penn State University professors recently released a report stating that production from Pennsylvania’s Marcellus Shale home to the largest gas reserves in the US will yield 3.5 billion cubic feet of gas per day in by the end of 2011. This would be double 2010’s yield.
In 2012, production should reach 6.7 billion cubic feet per day and in 2020, up to 17.5 billion, according to the Penn State report. This year, some 2,300 wells will be drilled (up from 1,405 in 2010), and the professors forecast some 2,500 per year to be drilled by the time 2020 rolls around.
The big win for the industry is New York State’s recent reversal of the ban on the practice. According to Pennsylvania’s Department of Environmental Protection, 24 of the 25 highest-producing wells are in the counties that border New York.
With the US leading the world in natural gas production (nearly 23 billion cubic feet in 2009), these predicted production amounts from the Marcellus not to mention other expanding reserves would considerably add to the global supply. Although the gas price is expected to remain stagnant for the next 25 years (at 0.5 percent annual growth, according to Fulp), if China ups its appetite for the stuff, US natural gas could become a much more crucial global commodity in the decades to come.
With power plants and metal producers both relying on natural gas more and more, it may not be cheap for long.
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