The second-largest U.S. natural gas producer argues that there are good reasons to be bullish on natural gas prices in the medium and long term because of shrinking supply and growing demand from the power, transportation, industrial and export sectors.
In a recent investor presentation, the company argues that the NYMEX forward price curve for natural gas is failing to recognize future supply and demand fundamentals and is likely “one of the most mispriced investments in the market.”
More Natural Gas Vehicle Drivers Will Drive Demand
That’s because a lot more of the fuel will be in demand as electricity generators switch from coal to gas; as petrochemical firms like Shell create chemical feedstocks from ethane, and as more companies switch their vehicle fleets to cleaner-burning natural gas as an alternative to high-priced gasoline and diesel, Chesapeake says.
There are “many reasons to be bullish on intermediate and long-term natural gas prices despite a warm winter and overwhelmingly negative consensus on natural gas,” the company told investors.
It predicts that power companies will increase their natural gas demand by 10-15 billion cubic feet a day over the next decade; that $4 gasoline will force policy changes to stimulate the market for CNG- and LNG-powered vehicles, and that the U.S. and Canada will be exporting LNG by the end of 2015.
The company’s outlook is “very reasonable”, said Lou Pugliaresi, president of the Energy Policy Research Foundation, especially given increased demand from the power sector that is already underway, and the powerful incentive of low natural gas prices on operators of transportation fleets.
“The difference between the cost of gasoline and the cost of natural gas is a real motivator,” Pugliaresi told AOL Energy.
Infrastructure Will Need Time to Catch Up
Although natural gas prices are expected to rise, the increase is unlikely occur quickly or be very large because some sources of higher demand, notably LNG exports, will take time, and a shortage of filling stations will hinder the widespread adoption of natural gas vehicles by individual drivers, he said.
“Is it likely that the price will move off $2?” he said. “Yes. But the road back to $5 or $6 is going to take a while.”
For the U.S. trucking industry, seen as a leading candidate for widespread conversion to natural gas, upward pressure on diesel prices is likely to remain this year and beyond because of current strains on domestic refining capacity and geopolitical concerns. These factors create a stronger incentive for operators to switch to natural gas, Chesapeake argues.
On the supply side, the company says production will fall as drillers, including Chesapeake itself, continue their recent move away from dry gas toward higher-priced oil and natural gas liquids.
It is called the supply contraction “the single biggest misunderstood aspect of the future bull case for U.S. natural gas.”
But there’s enough dry gas production that’s economic even at lower prices to prevent much of a rise in the market, countered Michael Lynch, president of Strategic Energy and Economic Research, a consultant in Winchester, Mass. “There’s a lot that can be produced at $3-$4,” he said.
Lynch argued that Chesapeake’s transportation assumptions, like those of its report overall, are “too optimistic” and that futures prices will rise “modestly over $3″ in the next 12 months.
Lawmakers, analysts debate the economics and politics of exporting LNG
As low prices dominate the United States’ growing natural gas market, what are the economic and political costs of exporting liquefied natural gas? In this E&ETV Special Report, lawmakers and analysts weigh in on the LNG exports debate and discuss how the issue could play into election-year politics. Interviewed experts include Joel Kirkland, deputy editor, EnergyWire; Rep. John Garamendi (D-Calif.); Rep. Pete Olson (R-Texas); Guy Caruso, former administrator, U.S. Energy Information Administration; Bill Cooper, president, Center for Liquefied Natural Gas; Lisa Epifani, former assistant secretary for congressional and intergovernmental affairs, Department of Energy; Kevin Book, managing director, ClearView Energy Partners; and Bruce McKay, managing director of federal affairs, Dominion Resources.
OTTAWA AND CALGARY— From Thursday’s Globe and Mail
Canada’s energy industry saw markets for its two main products head in sharply different directions in 2011: Global oil prices(CL-FT101.75-1.47-1.42%) averaged a record high $111 (U.S.) per barrel for the year, while natural gas prices in North America languished.
That disconnect prompted North American companies to focus their exploration on crude, and on natural gas plays that offer the prospect of extremely low-cost supply or “liquids-rich” gas that contains high-value propane and butane.
In 2012, companies are likely to continue that shift, while high-profile battles over the oil sands, pipeline projects and fracking will also persist. At the same time, both crude oil and natural gas prices may reverse course modestly during the year, as natural gas demand picks up and supply growth slows, and as global suppliers boost production as developed economies struggle out of recession.
Iran and oil prices
Political upheaval in the Middle East is a boon to oil producers everywhere. The loss of Libya’s 2.6 million barrels of daily production after the country’s revolution in February sent crude prices sharply higher.
In 2012, the focus will be on Iran, which has threatened to respond aggressively if European countries follow the United States in applying sanctions on its oil industry.
Now Iran is boasting about how easily it could close the Straight of Hormuz, where some 40 per cent of the world’s seaborne oil shipments travel. Iran is the world’s forth-largest oil producer, and while even the threat of attack spooked crude markets, a senior oil official from Saudi Arabia has since said Gulf Arab countries could make up for any lost production. This comforted oil traders, who on Wednesday pushed the price of crude down in both North America and Europe.
But should the standoff between the United States and Iran over its nuclear program escalate, watch for a widening of the political risk premium on oil prices.
The fracking fracas
The U.S. Environmental Protection Agency has increased the pressure on the industry with a study that found Encana Corp.’s(ECA-T19.55-0.04-0.20%) gas drilling in Wyoming polluted local ground water.
Never mind that the hydraulic fracturing was not a shale gas operation, or that the company claims the EPA work was shoddy and its conclusions flat-out wrong. Every state, province and municipality that is grappling with citizens’ concerns about shale gas exploration can expect to be inundated with “proof” that fracking poisons well water.
In places such as Quebec and New Brunswick, New York state and Ohio, the shale gas revolution is in its infancy, and governments are trying to determine how to benefit while reassuring nervous residents that environmental impacts can be minimized.
The industry – which has published its own drilling standards – should expect tougher regulations that will add to the cost of doing business. The EPA concludes a study next year and many insiders believe it will move to regulate an industry now covered by state rules.
Ottawa is conducting its own safety review, but is unlikely to intrude on what the provinces claim as their jurisdiction.
U.S. presidential election
When oil companies worry about political risk, they typically think about Hugo Chavez’s Venezuela or Bashar al-Assad’s Syria.
But Barack Obama’s United States has its own brand of political risk, and the partisan gamesmanship around TransCanada Corp.’s(TRP-T43.93-0.02-0.05%) Keystone XL project is just one example. Just before Christmas, the Republican-led Congress passed a bill to force the President to make a decision on Keystone within the next two months.
But the presidential election in November still carries enormous consequences for the North American oil industry.
Should the Republican nominee prevail in November, the industry could expect an administration that aggressively encourages drilling in ecologically sensitive lands and waters, and that would be less inclined to impose costly regulations.
But if elected to a second term, Mr. Obama would no doubt attempt to reinvigorate his administration’s climate-change policy, which could also prompt Ottawa to toughen its own approach to climate regulation.
Texas Gulf Coast access
The energy industry was sideswiped in 2011 when the Obama administration delayed making a decision on Keystone XL. Most observers expected that announcement to come shortly after election day.
They may be in for another surprise.
Republicans passed a bill in the week leading up to Christmas that forces Mr. Obama to make a decision in early 2012, even though the new round of environmental reviews in Nebraska may not be completed by then. With the lure of tens of thousands of jobs, a secure supply of crude from an ally, as well as demand, the industry is confident their arguments will trump environmental dissent.
“It remains very difficult to foresee an eventuality where it does not get approved,” David Collyer, the president of the Canadian Association of Petroleum Producers, said before the Republicans passed the bill forcing Mr. Obama’s hand.
Further, some experts predict Mr. Obama will find a way to put off the decision without quashing the project. TransCanada may start construction on the portion connecting Oklahoma to Texas, for instance.
Expect to hear more about how Keystone XL will benefit American oil producers, rather than solely focusing on Canada’s friendly relationship with the U.S.
West Coast access
Pipelines, once a boring and predictable corner of Canada’s corporate world, will continue to make noise in 2012. With Keystone XL in limbo stateside, the debate will escalate over two proposed routes to Canada’s West Coast from the oil sands.
Ottawa supports westward pipelines, such as Enbridge Inc.’s(ENB-T37.930.631.69%) Northern Gateway, and wants them built as quickly as possible. The Joint Review Panel kicks off its hearings in January, and with roughly 4,000 intervenors wanting a say, it could be a tedious haul.
“We have to be realistic – that is going to be a difficult hearing process for the project proponent, Enbridge,” said David Collyer, the president of the Canadian Association of Petroleum Producers, said.
First Nations wield immense power here – Enbridge’s quest will be infinitely easier if it can sway them in favour of the pipeline. But many First Nations are adamant that they will not back down. A constitutional battle over land rights could eventually unfold, some legal experts believe.
Kinder Morgan Inc.’s Trans Mountain pipeline to British Columbia’s tidewaters may have an easier ride since it’s an expansion of an existing line.
Liquefied natural gas exports
Natural gas prices (NG-FT2.97-0.12-3.94%) in North America are stuck in the gutter, which isn’t likely to change any time soon.
Instead, companies are looking west, hoping to ship liquefied natural gas to Asia to take advantage of higher prices abroad while reducing the glut at home. EnCana Corp. and other major producers are set to build export facilities in British Columbia, with a handful of projects in the works – even though the necessary infrastructure, including cross-provincial pipelines, doesn’t yet exist.