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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Tomas who wrote (13889)	10/12/2002 12:19:29 AM
From: Tomas	Read Replies (1) \| Respond to of 206363

Gas needs push to escape from limbo Upstream, October 11 As if by by stealth, natural gas prices in North America have been creeping steadily upwards and now stand at a level close to $3.60 per British thermal unit — a considerable premium on levels over the past five years. They have been pushed up by a number of factors, not least the traditional link with the price of crude, which continues its surge towards $30 per barrel thanks to the war drums sounding around Baghdad. In the late 1990s, when gas prices bumped along at the $2.25-$2.50 mark, drillers argued that they were not much interested in new wells because they were not economical enough. Then we saw the extraordinary period during 2000 when prices hit the $10 mark, triggering a flurry of mergers and acquisitions as companies scrambled desperately for more assets. Prices began rattling downwards last year, and despite a sustained revival during 2002, the number of rigs in action remains considerably lower than even 12 months ago. Why is this happening at a time when companies are financially strong, interest rates are very low and capital constraint is a distant memory? Some of the arguments are the same as those we explored in this column last week to explain why ExxonMobil and its rivals were refusing to turn the expenditure taps on with regard to oil. They remain worried by a looming military strike on the Middle East, by general economic uncertainty, and feelings that high prices could be a temporary phenomenon. They are also being more resolute than ever, rebuilding their balance sheets and demonstrating a new-found capital discipline. But in the gas sector, the whole picture is more cloudy partly because there is much less transparency in pricing. The industry is much more diffuse, with many small players in the game, and information on prices is much more difficult to obtain. What no-one will argue with is that current demand for gas is low while inventories, which stand at at 3 trillion cubic feet, are high. There can also be no guarantee that this winter will not be very mild, if not quite a repeat of last one — the warmest for 100 years. In such circumstances, the obvious direction for gas prices in North America should be downwards, but that is not the case. The reason for this appears, in the main, to be fears of shortages or "deliverability" should there be a serious cold snap. Low drilling rates are not a recent phenomenon. Over the past 10 years, many US companies have preferred to spend their money abroad rather than risk poor rates of return at home or explore for oil. US President George W. Bush has talked of opening up federal lands and the Arctic National Wildlife Refuge for gas drilling, but this plan has run into fierce opposition from environmentalists. There is also growing scepticism about that $10 gas price bubble. At the time, it was attributed to wobbles about deliverability in a period when the US economy was still going great guns. But since then, the ghastly roll call of corporate scandals, including Enron, plus allegations that the Californian energy markets were being manipulated has caused some to question whether the price spike really had anything to do with demand and supply. In these uncertain times it is perhaps not surprising that merger and acquisition activity has almost ground to a halt. Asset prices have risen once again and companies have been re-rated on the stock market. Companies such as Devon Energy were at the forefront of the buying spree between 2000 and 2001, doubling in size as it moved on Santa Fe Energy, Mitchell Energy and then Anderson Exploration, using mostly borrowed cash. However, by this time last year, Devon’s enormous debt mountain was causing people to question whether it had bitten off more than it could chew and in February it recorded fourth quarter net losses of $518 million. It took $1 billion worth of asset sales to remove some of the pressure, and then its stock price recovered as enthusiasm for the exploration and development sector picked up this year. This has left other players, such as Apache, waiting on the sidelines. It had hoped to pick up distressed — or at least cheap — assets but has found itself left watching as values rose. Meanwhile, other sources of gas, such as new liquefied natural gas projects, continue to slowly wend their way through very long planning process. So what is likely to break the natural gas industry out of limbo? A cold snap could certainly encourage some to get back to drilling, as could a drawn-out war with Iraq which would send crude prices up even further, but a substantive economic recovery would be the real driver of a sustained and sustainable rally. Otherwise we might be looking at gas prices gradually unwinding and a further period of torpor.