Natural Gas:

IPAMS's Bennett discusses future of industry under Obama administration

How will the Obama administration's recent budget and land-use decisions affect the future of the natural gas industry? During today's OnPoint, Porter Bennett, chairman of the Independent Petroleum Association of Mountain States' Natural Gas Committee and CEO of Bentek Energy, discusses the future of natural gas drilling and exploration under the Obama administration. He addresses recent movement in Congress to take actions against market manipulation in natural gas markets. Bennett also gives the short- and long-term outlooks for natural gas prices.

Transcript

Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining me today is Porter Bennett, chairman of the Independent Petroleum Association of Mountain States Natural Gas Committee and CEO of Bentek Energy. Porter, it's good to have you on the show.

Porter Bennett: It's a pleasure to be here.

Monica Trauzzi: Porter, you're in town talking to lawmakers about some specific concerns your industry has with the budget and how it addresses tax credits for natural gas drilling. What changes are being proposed and how might this impact your industry?

Porter Bennett: Well, there are several of them. Number one, the Secretary of Interior has revisited some of the leases that were in Utah. They're looking at restructuring some of the resource plans that had been already issued and they're bringing them back to look at them again. So this is a little bit of a problem on that front. Then in the budgets, the depletion allowance and those aspects of the way taxes are calculated on the industry that is problematic.

Monica Trauzzi: What's the current state of natural gas reserves in the U.S.? I mean it's shifted over the last few years.

Porter Bennett: Vastly different. In 2003, 2004 there were frequently articles about how we're running out of gas. We were at peak gas. That concept has been about as thoroughly obliterated as you can accomplish as an industry. Over the last five years the industry spent just a little less than a trillion dollars on exploration and development of reserves in the United States. As a result, we now have well over 100 years of proved reserves in the country at current consumption rates. Those reserves could be produced at a price much lower than has been the case in the past. Most of the basins in the U.S. you can look at developing reserves. It depends on how you count it. There's lots of differences between companies, but the average is somewhere between 350 and 450, so at that price there's a lot of production in this country, far more than we've had access to any time in my career of 25 years. And it's set up a vastly different energy structure or economy if you will. There's no reason that natural gas shouldn't be the backbone of our energy, of our energy program.

Monica Trauzzi: You mentioned a couple of things that the Obama administration has already done on natural gas. What's your take on how this administration is approaching things overall?

Porter Bennett: I think it's very a hodgepodge-ish. It's almost ad hoc-ish and it's not very well thought through. For example, in the energy program, the budget, there's a lot of factors that essentially discourage the production of natural gas, either economically outright or by taking reserves off the plate so to speak. On the other hand, you have the promotion of alternative energy, which while whether it can work or not at the proposed rates is really inconsequential, at one level, between now and the next 25 years, natural gas is going to have to be there to back it up at least and as the Plan B if the alternative energy approach doesn't work. So you need natural gas. We need to consume much more natural gas than we do now. And yet the policies in the budget and the actions of the Department of Interior and others discourage and work in conflict with that.

Monica Trauzzi: Have you gotten any indication of why this lack of enthusiasm among the administration, also conservative Democrats in Congress, why it exists?

Porter Bennett: Well, I'm not so sure that with conservative Democrats in Congress that it does exist. I think some of the meetings I've been in today they seem to be much more receptive to the notion. I think partly it's that some of the true costs of the proposals that are out there are just starting to come out. I was shown an article in the New York Times yesterday where they're looking at the cost of alternative energy being much more substantial than was originally planned. I saw a news release down in Austin where utility bills have gone from $35 to now they've put a new solar facility in and there are some that estimate the utility bill is going to go up to $135. So that's a quadrupling of the power rates for normal residential customers. I think those realities that are part of the alternative energy program are just beginning to be apparent and it's going to take a while for that process to unfold before people begin to get pretty disenchanted with the whole idea. I'm not saying alternative energy doesn't have a role. I think it absolutely does. It has to be used. We need to wind, we need solar, we need all those technologies, but they have to be applied judiciously. You can't just, you know, I saw something in the energy plan, they're talking about 25 percent renewable standard. Well, there's a big cost associated with a 25 percent renewable standard and it varies depending upon where you are in the country. And you just can't set that and promote it without figuring out how you're going to pay for it. And are people really willing to pay that much for it? I suspect not when it's all done.

Monica Trauzzi: There's legislation circulating in the Senate that seeks to address market manipulation in natural gas markets. It would essentially expand FERC's authority to take immediate action against manipulation. How concerned are you about manipulation in natural gas markets and is this the right way for Congress to be approaching this? Do they need to be approaching this?

Porter Bennett: That's a good question. Let me attack the first part of it, is it necessary? The speculation, is it necessary? If there's demonstration that companies are doing things that are manipulating the market, I mean absolutely. I think that's an open question right now. I think there are a lot of economists that would say that to the degree that speculators have really impacted prices is very nebulous. There's not a clear-cut cause and effect relationship there. I think that in most of the discussions I've heard of the price has to be going one direction or the other before a speculator really can make much of an impact. There's no question that I think speculation will accentuate a trend. It will take the prices and drive them below bit higher or drive them a little bit lower. When they go up everybody gets upset. Speculators had just as much of a role in bringing the price down to $2.50 in the Rocky Mountains today. So I think speculation is an important part of making gas commodities, any commodities liquid. You have to have some of that in order to make the system work and so I would be very concerned that the approach taken does something inadvertently. The unintended consequence of history, as Teddy Whyte once said, is very important and very easily you can do something which ends up hurting the market more than the correction that it was trying to attain.

Monica Trauzzi: What's the short-term outlook for natural gas prices? We saw natural gas production decline in the fourth quarter of 2008. Could we expect to see prices increase as a result of that moving through 2009 and early 2010?

Porter Bennett: That's a long question. The short answer is no and there's a lot of reasons for it. Number one is we have just tremendous productive capacity in the United States right now and if you look at the trend last year, even though it declined slightly in the fourth quarter, we were still up over 2007 by almost 7 percent. Demand grew by less than 2…between 2 and 9, or a flat 2 percent depending upon who you look at. So we built a large surplus last year. Today our storage levels are, last I saw, it was well over 150 BCF higher than they were at this time last year and they've been at the end of a withdrawal season for a long time. That suggests that we're going to have a supply overhang for quite awhile. The demand, because of the recession, is still declining. We're still seeing industrial demand fall off. We haven't seen power demand pick up because in part the recession. It's also been fairly moderate temperatures. So you put all that together and fundamentally there's no reason for prices to rise much. Then on top of it you have pipeline constraints. What the effect of a pipeline constraint does is it restricts the amount of gas that can get out of a production region, which intensifies gas-on-gas competition on the other side of the constraint. That drives the price even lower. So I think actually the price trend that you're likely to see over the next few months is a decline in price that will continue to drive some of the drilling to slow down. You'll probably see some actual shut-in production. I think you're actually seeing it now a little bit in some places and that will help to kind of right the ship so to speak. But even at that point, because we know where the production is, we know how to get at it, we have the rigs in place it will be very easy to bring production back up so you won't have that prolonged period of shortfall, which is what underpins the nasty price spikes we've had historically. I think this country is in a vastly different place in the natural gas world than it has ever been or at least has been since I was a kid.

Monica Trauzzi: Okay, we'll end it right there on that note. Thank you for coming on the show.

Porter Bennett: You're welcome.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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