NATURAL GAS:

Shale's long-term success in the U.S. poses challenges in the interim

By 2016 or 2017, surplus natural gas from U.S. shale plays should be headed away from new export terminals, retirements of older coal-fired generators should accelerate and new billion-dollar cracker installations will begin turning more gas liquids into petrochemical feedstocks, speakers at an energy forum predicted yesterday.

The problem for much of the shale gas industry is how to stay healthy until then, when new sources of demand are expected to raise gas prices to more profitable levels, according to several panelists at the 2013 Energy Information Administration conference in Washington, D.C.

Katherine Spector, executive director of commodities strategy for CIBC World Markets Corp., noted the EIA's tepid forecast for U.S. gas production this year and next. According to EIA's most likely scenario, total U.S. "dry" gas production (excluding natural gas liquids) falls by 0.6 percent this year, including an increase of shale gas output of less than 1 percent above 2012 figures.

Shale gas production doesn't make a major upward move until 2016, according to EIA. Spot prices for natural gas at the major Louisiana pricing hub will drop to $3.12 per million British thermal units in 2014 and 2015, below this year's average forecast price of $3.25, according to EIA's Annual Energy Outlook. Prices don't pick up until 2016 either, in the EIA assessment.

In the short term, lower natural gas prices have only a limited impact in stimulating new demand for gas, she noted.

"I wouldn't say demand has been stagnant. Last year, we saw tremendous growth in gas demand, some of which is being given back down now," Spector said.

But one expected source of gas demand -- the competition between natural gas and coal as a fuel for U.S. power plants -- is likely to remain a standoff in the immediate future.

Not until retirements of older coal plants and expansion of new gas-fired utility boilers picks up will gas production get a pull from that direction, Spector said. "That becomes a lot more critical in 2016," she said.

"There is long-term trend for coal to lose market share to natural gas" in the utility sector, and Obama administration policy decisions continue to be a major wild card in that outcome, she said. But she added, "This year's numbers [on utility gas demand] are going to look pretty poor."

Another source of future demand is LNG exports. But Spector doesn't expect them to push prices up significantly at the outset, she said. "It is not clear to us that LNG will be the variable that makes or breaks the balance."

The first Energy Department approved export facility for liquefied natural gas -- at Cheniere Energy Inc.'s Sabine Pass plant in Louisiana -- is scheduled to go online in 2015, and several other projects are seeking approval to open in 2017.

"In my view, the volume of LNG exports will be fairly marginal" in its impact on U.S. prices and production, she said.

Sen. Lisa Murkowski (R-Alaska) took the same position in her conference remarks. "Either we have a surplus of natural gas, which can be sold abroad, or we don't," said Murkowski, the top Republican on the Senate Energy and Natural Resources Committee.

"If we do, we can add LNG exports to the record levels of natural gas that we are already exporting. ... If we don't end up with a surplus then we won't see large levels of LNG exports anyway because the economics simply won't make sense. "

For that reason, the decision on approving new LNG export projects should be an easy one for the Energy Department, she said, a position some consumer interests and industrial gas customers strongly contest.

The question of whether the United States should authorize exports of crude oil is much more politically charged, she said. Crude oil and gasoline pump prices stay high, her constituents complain.

"I don't think we'll see that debate this summer," she said. "But if we don't handle our LNG exports in the right way with sensible, data-driven analysis, then there is little hope we are going to be able to handle a hot-button issue like crude oil in a way that can escape the damaging strife of partisan squabbling. We've got to get LNG exports right."

'We are just in the first quarter'

James Tramuto, vice president for government and regulatory strategy at shale gas producer Southwestern Energy Co., expressed the industry's confidence in the short- and long-term outlook.

The EIA panels did not include speakers who challenged the unconventional oil and gas producers' ability to manage the environmental risks and community impacts of the shale boom. Tramuto said the issues were under control with close collaboration of state regulators and producers.

"As a shale gas producer we are very, very comfortable and very confident" about the size of the U.S. shale gas base, he said. "Shale plays have gotten so much larger than anything we've seen over the past century," he told the conference.

"The numbers continue to grow," he added. "I think we are just in the first quarter."

Tramuto told reporters that the industry's pullback on drilling operations will support higher prices. "We really do believe that toward the end of this year or early next year that supply and demand are going to be in balance," he said.

"Look at the number of rigs that are off the system. You have 246 horizontal [gas drilling] rigs. A year ago it was almost double that amount. Producers do have a way of regulating the choke, if you will, and either taking those rigs and putting them to work on the oil side, if you've got oil leases, or else we stack them."

That strategy has its downside, reducing the production that drives energy company income, heightening financial pressures on producers with the heaviest debt obligations. Spector said most producers have been able to add protection to their bottom lines this year and next by buying futures contracts at prices above $4 per thousand cubic feet.

Nations in Western and Eastern Europe, Russia, China, India, Australia, Brazil and Argentina also have significant unconventional oil and gas reserves. While they have competitive geological formations, they can't exceed the "above ground" assets the U.S. possesses, said Andrew Slaughter, vice president for energy research of IHS, an energy data and analysis firm.

This "special sauce" the United States enjoys includes private ownership of mineral rights, technological leadership, long-established capital markets to fund energy entrepreneurs and "a regulatory framework appropriately led by state authorities and appropriately accommodative," he said.

"The above-ground conditions determine the pace" of development "and whether you can do it at all," Slaughter said. Speaking of the tight oil outlook, he added, "We don't see a long-term decline if the price level is such to maintain [development] activity."

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