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04 11, 2012 by Houston Chronicle
One of the warmest winters on record cooled demand for natural gas, taxing the nation’s storage facilities and threatening producers’ balance sheets.
The soft demand for heating left the nation with more natural gas than in any March on record. Storage facilities are holding 60 percent more natural gas than usual, according to the U.S. Energy Information Administration. The abundance has pushed prices down to just over $2 per million British thermal units from $14.32 in 2005. Gas closed down 7.6 cents at $2.031 in Tuesday trading on the New York Mercantile Exchange.
That can mean lower utility bills for consumers. But it has sent natural gas producers scrambling to relieve their portfolios of the low-value commodity.
“This is going to be the most challenging year yet for producers,” said Amber McCullagh, senior analyst for research and consulting firm Wood Mackenzie. “The gas market has been somewhat lucky in prior years, because we had several hot summers and several cold winters. But their luck ran out, and it ran out in a big way.”
Natural gas production has surged as technology has allowed producers to unlock gas trapped in deep, dense shale rock.
The Energy Information Administration forecasts natural gas storage will reach a record-high 4.04 trillion cubic feet by October. It hit 2.5 trillion cubic feet last month, the highest March inventory since the agency started recording natural gas storage in 1994. The previous record was March 2006, when the country shouldered 1.9 trillion cubic feet.
Changing game plans
In a rush to avoid losses, producers are selling off assets and revamping investment strategies.
“There’s really not that many ways out of it,” said Alan Lammey, energy analyst for Weatherbell Analytics. “They either have to change their game plans and start going after more oil-based plays, or they have to file bankruptcy or sell their assets.”
Rigs are moving out of fields that yield dry natural gas, or methane, and moving into fields that produce crude oil and higher-value natural gas liquids. NGLs, like propane, butane and ethane, are used to manufacture plastics and other everyday items.
Chesapeake Energy Corp., of Oklahoma City, the nation’s second-largest natural gas producer behind Exxon Mobil Corp., has banked on that approach as it has come under pressure from mounting debt and low gas prices.
Eighty-five percent of the company’s capital spending budget this year targets liquids-rich plays, up from just 10 percent in 2009.
Effects on share price
Still, 83 percent of Chesapeake’s hydrocarbon reserves are in natural gas, leaving the company vulnerable to swings in gas prices, according to Securities and Exchange Commission filings.
Wall Street has taken notice. Stock prices for companies heavily invested in natural gas production have taken a beating.
Chesapeake shares are down 37 percent since this time in 2010.
Shares of Comstock Resources, a Frisco-based producer with 85 percent of its reserves in natural gas, have plummeted almost 50 percent since last spring. The company also has shifted its strategy, targeting 77 percent of its 2012 drilling budget toward oil and pulling all of its rigs out of the gas-heavy Haynesville Shale in Louisiana.
At Oklahoma City-based Devon Energy Corp., 35 percent of production was in oil and natural gas liquids in the final quarter of 2011. By 2016, the company projects oil and NGLs will make up more than half of production.
Dry gas makes up about 60 percent of the company’s reserves, but its gas fields are largely dormant these days, said spokesman Chip Minty. Drilling rigs have been cleared out.
“We’re not out there investing in new wells in a $2 market,” Minty said.
The shift to liquids could lead to gains in the near-term. But it also could create an oversupply in liquid natural gas, said Neal Dingmann, managing director of equity research for SunTrust Robinson-Humphrey.
“If the low dry gas prices cause the continued climb in liquids drilling, is there going to be a point where some of these other liquids… become overabundant and the prices start to break down materially as well?” Dingmann said.
Looking for rebound
Anadarko Petroleum Corp., based in Houston, also is pursuing more natural gas liquids, but the company believes natural gas prices will not be prohibitively low for long. “We absolutely believe natural gas is bound to rebound,” spokesman Brian Cain said.
How soon remains a question.
Several analysts forecast that natural gas will continue to drop over the next few months, even dipping below $2 per million Btu by summer.
But new demand, largely from the power generation industry, could lift prices again, they say.
“There is a tsunami of new demand coming into play in 2013 and beyond,” Lammey said. “If producers are able to trudge through this time of really low prices, there is a golden opportunity in long-term natural gas investments.”
But while natural gas probably will become the fuel of choice for new power plants, major plant expansions have been slow to develop, since natural gas prices are still considered volatile when compared with coal, said David Knox, a spokesman for NRG Energy.
“In the short term you have a situation where natural gas can be the cheapest form of energy,” Knox said. The long term, he said, is less certain.
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