Natural gas relief by 2010: report

Friday » January 30 » 2009

Natural gas relief by 2010: report

Dina O'Meara
Calgary Herald


North American natural gas markets are expected to improve by 2010 as storage surpluses get drawn down and demand makes a slow recovery along with the economy, according to a new energy overview.

Peters&Co. predicts natural gas prices will remain muted until the end of the year as the United States economy struggles to pull itself out of a recession and fuel inventories fall.

"The price of natural gas will likely remain under pressure until we see a material change in U. S. domestic supply or demand," the energy brokerage said in Tuesday's report.

After hitting a high of $13.58 US last July, natural gas futures have averaged $5.37 US per million British thermal units year-to-date, with only the December contract prices at or above $6 per mmBTU.

Spot deals at the benchmark AECO-Chubarearound$5.69 per thousand cubic feet, with summer pricing at $5.73 per mcf, and 2009-10 winter pricing at $7.44 per mcf.

The energy investment broker-age house forecast a 1.125 trillion cubic foot drop in natural gas demand between January and November this year, with a 625 billion cubic foot supply decrease, driven by poor economics as industry and producers cut back.

However, as the economy revives and industrial demand revs up again, prices should start shifting upward, the report stated.

"While spot natural gas prices are currently depressed and will likely remain so for the remainder of the winter, there is some hope that equilibrium between supply and demand will begin to develop over the summer with our forecast for supply declines to catch up with demand shortfalls by the beginning of the 2009-10 withdrawal season," according to the report.

Canadian production is expected to fall by 700 million cubic feet this year and another 400 mmcf in 2010. The decrease will be driven by natural decline rates, around 21 per cent a year, steep initial production rate drops in the 60 per cent range, and a drop in new wells drilled, Peters &Co. said.

The number of new wells in the U. S. are forecast to fall about 15 per cent from current levels --already down 23 per cent from last summer--on poor pricing and tight budgets. Based on those numbers, supply could fall by around 2.5 bcf per day by yearend 2009, or 370 bcf, January to October.

The wild card in the equation could be the number of new wells that have been drilled but not completed and tied into a pipeline system this year.

A backlog of wells were a strong offset to Canadian production de-clines over the past two years, mitigating the pace of supply contraction.

"If the same situation exists in the U. S. the pace at which sup-ply declines could obviously be tempered," the report said. "In addition, in periods of low prices, operators generally revert to more recompletion activity in existing well bores, which could also bolster supply."

Production in the U. S. rose about seven per cent last year, while industrial demand, the high-est consumer of natural gas, fell. On this side of the border, production fell on natural declines and a drop in drilling.

Canadian storage levels currently are about two per cent lower than last year at the same time, affected by declining production, with U. S. storage down one per cent from last year. Withdrawals this winter are about 852 bcf compared with one trillion cubic feet last year.



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