Interesting story:
Cooking with gas
Friday, December 07, 2001
Glenn MacNeill
TORONTO (GlobeinvestorGOLD) -- The current gloom notwithstanding, investors can benefit from natural gas stocks in their portfolios. Certainly, like crude oil prices, the short-term outlook for natural gas is not favourable. Prices have fallen around 70 per cent since record highs at the beginning of 2001. Gas storage in the United States is at record levels. But this spells opportunity for buying gas-weighted stocks.
The president of Imperial Oil stated that trying to predict oil prices is "a mugs game". I agree. Factors such as OPEC rhetoric, short-term inventory swings, TV "experts" and jumpy commodity traders all seem to be more important than economics 101: supply and demand. To me, the natural gas market is less risky than oil, limited to North America, easier to understand and over a longer-term bound to rise. Why is that?
Supply.
The natural gas explorers in our continent have spent a record amount of money and drilled a record number of wells over the past year in the search for gas. While gas production in the United States has declined, production in Canada's less-explored petroleum areas has gone up. Half of Canada's increase comes from one discovery: the Ladyfern B.C. Reservoir. Engineers who have studied the field say that the joy derived from this find may be short-lived, however, as its production will start to decrease at unusually high rates.
It seems the industry is not finding the quality of reserves it used to. Initial production rates are lower and the rate at which production declines is faster. The low-hanging fruit has been picked and the industry will have spend more and try harder in the future.
On the demand side of the equation, a recession and moderate weather in North America have contributed to lowered demand for natural gas. An improving economy will correct this situation as industrial production increases. Stimulative monetary and fiscal policies by central banks and governments, respectively, will likely spur the North American economy in 2002.
The engine for increasing natural gas demand will be the electrical power generation industry. Gas powered plants are relatively environmentally acceptable, cost less to build, and have the shortest lead-time of all economical power generation methods.
U.S.-based Calpine Corp. is an example of a natural gas-based generation company requiring significant amounts of gas to meet its electrical generation targets. The company's power portfolio currently generates 11,085 mega watts (mw) of electricity. That uses an incredible 1.9 billion cubic feet per day of natural gas. On the drawing board are plans for another 35,000 mw of generating capacity. To generate this additional amount of electricity, about six billion cubic feet per day of natural gas is required at current efficiency levels. Canada produces in total close to 17 billion cubic feet per day, of which about half is already exported to our southern friends. And Calpine is just one example of an electric company that will require massive amounts of natural gas to feed North America's appetite for electricity.
Now is the time to consider increasing your investment in natural gas stocks. |
