<<<Mike - Good article, thanks. Please excuse me if I repost it elsewhere.
Pretty much sums up what I've been trying to communicate. Don't know if I see things being quite as buoyant as they do when the economic recovery finally rolls around, but we'll see. I wouldn't expect them to feel any differently or they wouldn't be in the business.>>>
I am somewhat amazed that you liked that article, and concluded it supports only your point of view that gassy stock prices will continue to drop and not rebound for a year. I liked the article too, and think it supports my view that the industry will and is quickly adapting to the temporary imbalance of supply and demand situation by shutting in production, reducing drilling, locking in higher futures contracts, lowering costs and taking advantage of lower interest rates for debt financing which taken together allow oversold stock prices to rebound once the market sees the clouds over the future dissipate.
The industry unfortunately overreacted to the higher NG prices of last winter by drilling too many cheap, quick to produce, and quick to tie in, shallow holes in existing fields. That increase in production further acerbated the declining temporary industrial demand situation.
We obviously disagree how fast the industry can react to this hiccup, and perhaps how tight the supply/demand situation still is, and how far the market overreacted (or in your case underreacted as yet) to the hiccup, and perhaps how fast the market will correct to what I view as an overreaction. That is what makes a market,...and why I am long and getting slowly longer, while you are out or perhaps short, and so wish to thwart and deride all opposing views. On the other hand I welcome and encourage opposing articles on the situation written by experts, analysts and market participants because if the long term situation is up and it is only a matter of timing, I can't get hurt by holding, whereas a trader can lose every cent.
Counterparty to those gas producer futures contracts discussed in one of the paragraphs above, are those industrial customers that have been locking in future prices in the US$3-5+ range out one year and more, and are now preparing to restart manufacturing operations because they can be profitable at those prices,...evidence of this comes from recent reopening of some fertilizer and glass producers in Alberta, heavy users of NG. These companies have reduced inventories and are now ramping up production to produce for next years needs.
Demand for NG will soon rise, and NG futures prices will creep up allowing near term prices to jump as well. It's simply a matter of timing and if you agree with that article then I guess we only disagree with the timing (still not sure why that because I disagree with the timing, I must have blinders on,..does everyone who disagrees with your points of view have blinders on?).
So you assume these price increases in gas and stocks will not take place this heating season,...I think they will. I think the market will soon factor in the implications of reduced drilling and increased production declines of todays wells together with resumption of production of industrial heavy NG users.
The article does seem to agree with a number of my points,...disagrees with my timing of gas price increases, but perhaps they underestimate the speed the market can catch on and bid up prices, particularly stocks prices which should rise in anticipation of the rise in the price of the commodity.
1. I implied there was a "production spike" in the spring and summer brought about by increased drilling of cheap, quick to drill shallow wells,...something you argued against, choosing to explain the drop as only a drop in demand. This production spike accelerated and worsened the fast fill of the storage facilities.
"At the moment, the US gas market is oversupplied as a result of a 1 bcfd supply growth and 3 bcfd demand loss, said Mark Papa, chairman and CEO of EOG Resources Inc."
2. I said the current production spike is unsustainable because the best gas plays are running out of cheap gas, the industry is refusing to drill wells at current prices and are capping uneconomic wells, decline rates for most wells are high and increasing, the industry won't make this years mistake of pushing wells to production in the shoulder seasons allowing the storage to be filled so quickly, demand is increasing every year, but new supply can't replace last years draws (this has been true for a decade).
Papa predicted, "Rig activity will fall to yearend. We [producers] will drop another 200 rigs, with the Gulf of Mexico shelf proportionately hard hit compared to land rig activity. In our opinion, the remaining prospects on the gulf shelf absolutely do not work [at prices] below $3.25/Mcf."
Reducing drilling activity will accelerate current production declines. Then when industrial production rebounds, there will likely to be a step change in gas prices from $2/Mcf to $3/Mcf, instead of smaller incremental increases, Papa said.
Meanwhile, EOG Resources plans not to push its gas production so hard in the fall and spring shoulder months. "We don't see any reason to hurry and hook up recently completed wells, so we can sell for current prices of $1/Mcf in the Rocky Mountains, particularly if we think the price will go up in 6 months," Papa said.
US demand for gas as the preferred fuel for future power generation is real, he said.
"The biggest growth area for natural gas over the next 10 years will be for power generation," said Papa. "Our guess is that the long-term stabilized gas price will be $3.25-$3.50/Mcf. Anything above $4/Mcf destroys too much industrial demand. Prices at $2.25/Mcf will cause production supply to fall 1.5%-2%/year, which is not going to work either."
With smaller discoveries and rapid production declines, Papa and Schiller said, the US gas market will be supply-constrained until a pipeline is built to bring gas from Alaska's North Slope to the Lower 48 states in about 2007.
Until then, any new incremental supplies of gas will have to come from hydrocarbon basins in the Gulf of Mexico, South Texas, and western Canada.
Production decline rates in virtually all of those areas are getting steeper every year because of new and imaginative well completion technology developed during the past decade that allows the industry to produce reserves quicker, said Papa.
As a result, Schiller said, "The wells we're drilling today, are not going to be here 12 months from now."
Texas, which produces 26% of US gas, saw its drilling activity increase by 57% from Jan. 1999 through September 2001. Yet its gas deliverability declined 1% this year, even before the recent rig count reductions, said Papa.
Oklahoma, onshore Louisiana, and New Mexico all show the same trend. The only US bright spot is Wyoming. Producing about 8% of US gas, it's the only state where deliverability has increased, up 13% with a 51% jump in drilling activity, Papa said.
"We're not going to solve the problem on the supply side," Schiller said. "In the Gulf of Mexico, we're down to the 5 bcf prospects. We can no longer find wells with 25 bcf reserves that flat line at 40 MMcfd after they're drilled. Everything we're drilling now is tight gas."
He said the only long-term solution is to open new areas to exploration, such as government lands in the Rocky Mountains, the eastern Gulf of Mexico, and Arctic National Wildlife Refuge in Alaska. |
