Conflicting news coming out of the natural gas sector these days.  We’ll look at the bad news first:

The FT reported earlier in the week that the natural gas “boom has busted spectacularly and the prognosis for a recovery in drilling activity looks bleak.” (http://www.ft.com/cms/s/1/63537b88-7536-11de-9ed5-00144feabdc0.html)  The US market in particular is over-supplied, with gas storage at ”2,860bn cubic feet, far above typical levels, and underlying consumption indicates tepid demand for these inventories once the heating season begins in three months.”  The FT notes that the ”ensuing collapse in prices has seen drilling activity scaled back sharply.”

By nearly all measures, the gas sector is in the doldrums.  “A closely watched rig count figure compiled by Baker Hughes shows a 55 per cent drop in total US rigs since last September’s peak. The picture is far worse for gas than oil, with a 57 per cent drop to date this year compared with 37 per cent for oil rigs. A more forward-looking indicator, US land permits (needed to drill), recently fell to a rolling four-week average of 617 versus 1,402 a year ago, according to Credit Suisse.”  So, greater than 50% drops in both rig counts and forward looking land permits implies that this bearish gas market has a ways to go.  No wonder gas producers are trolling the halls of Congress, looking for ways to ensure that any energy/climate legislation is structured to quickly revive demand for the fuel.  They don’t like the renewable electricity standards that are currently pending on the theory that requirements for expensive renewables will lead to more economical coal dispatch to lower overall costs, at the expense of slightly more pricey natural gas-fired power.

Of course long-term, the future for natural gas is bright, as any cap on carbon emissions, or comparable price on carbon, will advantage gas versus coal — as the former is about 60% cleaner-burning than the latter.  EIA projections that factor in a price on carbon uniformly show strong growth in gas consumption and flat-lines or declines for coal.

This used to worry folks concerned about creating a dangerous reliance on imports in the form of liquified natural gas (LNG), for which US consumers would be at the mercy of a world market.  New projections of avaialable domestic supplies have eased those concerns, and a recent presentation by the Navigant firm at the Aspen Institute shows dramatic gains:

• In 2006, PGC Report’s Resource estimate was 1,530 trillion cubic feet (Tcf) with about 137 Tcf of shale gas.  At 2006 US production rates, that amounts to 82 years’ worth of gas supply.
• A 2008 supply assesment for the American Clean Skies Foundation concentrated on shale gas as evaluated by producer reports.  The total supply estimate rose to 2,247 Tcf, of which 842 Tcf was shale gas.  At 2007 production that’s 118 years’ of supply.

And the picture may be even rosier than that, according to the Navigant presentation:

• The Barnett shale yield has grown from 94 MMcf/day production levels in 1998 to 3,014 MMcf/day in 2007; an increase of more than 3000%.
• Fayetteville, Haynesville and Woodford are all showing similar signs of ramping production.  Marcellus will be next.
• Technology has allowed access to and economic production of a vastly greater resource base.  Specifically, improved hydraulic fracturing techniques and greatly improved horizontal drilling have allowed tight, geographically diffuse reserves to be developed in large volumes.
• Producer estimates placed the “Big 6” plus Marcellus at 27 to 39 Bcfd upon full development.

So, are we “awash in gas” or sitting on “an ocean of gas” but experiencing just a bit of a dry spell?  Sure seems so.

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