Natural Gas Prices - Up?

Lou Kilzer of the Pittsburgh Tribune-Review wrote this story "Natural gas prices set to jump with exports" taking issue with plans to export LNG from the lower 48. In the story he quotes Boone Pickens as saying "we're truly going to go down as the dumbest generation." referring to plans to export LNG.

He also details more LNG export plans, specifically:

Freeport LNG Expansion LP, together with Liquefaction LLC, applied on Dec. 17 to export 1.4 billion cubic feet of natural gas per day from a terminal port near Freeport, Texas. Lake Charles Exports LLC, a subsidiary of British-based BG Group and Houston-based Southern Union Company, applied to DOE on May 6 to export 2.0 billion cubic feet a day from its Lake Charles, La., facility.

If the DOE approves those requests, combined with the Sabine permit, the total 5.2 billion cubic feet a day proposed for export would represent 8.4 percent of U.S. production, a Tribune-Review analysis determined.

The story also bemoans the fact that the US imports 10% of our gas needs. According to the Energy Information Agency (EAI) gas imports in 2010 averaged 10.4 BCFD. For comparison the proposed Alaska Gas Pipeline will export 4.5 BCFD of gas to Canada, offsetting about half of our natural gas imports.

In summary, according to the article, exporting LNG is a bad idea according to the author because:

1. LNG exports will drive up gas prices
2. We would export clean energy and import dirty oil
3. We are dumb

Let's examine these outcomes and fill in the blanks;

1. Exporting LNG will drive up natural gas prices - GOOD. Current pricing in the $4/MMBTU range will not support job growth in America. $6/MMBTU gas puts Americans to work - building LNG plants, building pipelines, and building petrochem plants. Maybe even building the Alaska Gas Pipeline. I don't see a problem with that. For once we can export a product to Asia and keep the jobs at home.
2. Importing "dirty" oil sounds just awful doesn't it? The fact is that high sulfur, thick crudes are less expensive and our technological leadership in refining allow us to use the materials. American know how, cheaper products - can't beat that.
3. Are we dumb? I don't think in those terms. Markets are pretty smart at figuring out how to maximize returns. The Pickens Plan seeks to convert our trucking fleets over to compressed natural gas. I'd call that a pretty good idea, it would be even better if Boone was spending his money instead of reaching out for my tax dollars to fund the plan. Of course increased domestic use of gas for transportation will drive up price which is OK with me since that will spur development and build domestic employment.
   

I can offer a few ideas, and I think these will build a better America:

1. Support the conversion of LNG import terminals into export terminals. Conversion of these facilities is the most cost effective way to get into the LNG export market.
2. Let's get serious about Gas To Liquids. Our cheap natural gas and coal can be used to make clean liquid hydrocarbon fuels. Fuels that will burn in our existing cars trucks and trains without all the taxpayer funded investment required by the Picken's Plan. Domestic GTL will help protect us from overseas supply disruptions.
   
3. Let's build facilities in this country instead of building overseas. Let's build LNG export terminals, new petrochem plants, and new pipelines including the Alaska Gas Pipeline. Building here equals jobs here.
   

Natural Gas Prices - Is the wild ride over?

Stable natural gas prices in the $6/MMBTU range will support the shale gas industry in the lower 48 and also construction of the Alaska gas pipeline. The Dallas Morning News reports these comments of Atmos Energy's Chairman (retrieved from Downstream Today):

"We've got a 100-year supply of natural gas that we know of, and we've got stable prices," Best said Friday during a panel discussion at a North Dallas Chamber of Commerce gathering. "It's Economics 101. When you have a big supply, you have stable prices, and those prices are stable today."

Natural gas prices have been around $4 per thousand cubic feet for the past year, after rising three times as high a couple of years ago. Natural gas companies have been producing more of the heating and electricity fuel in the U.S. because of cheaper and more effective technology.

Atmos operates the regulated natural gas utility in North Texas and elsewhere. The company doesn't make money by selling natural gas, only from delivering the gas.

Best said the sweet spot for natural gas prices is between $5 and $7 per thousand cubic feet.

"At that level, the producers could drill and would have a fair return. The consumers would not feel that prices were too high," he said.

Long term prices in this "sweet spot" range should help build American energy independence including the Alaska Gas Pipeline.

The Future Price of Natural Gas

A lot of Alaska Gas Pipeline speculation focuses on the current "low" spot price of natural gas. Obviously no one wants to spend billions building a pipeline to connect Alaska natural gas to the lower 48 if inexpensive gas is available near consumers. But does the current low spot price really reflect the actual prices paid during the first 20 years of gas line operations? Probably not. To illustrate this point look at the following two examples:

1) The graph below shows the prices for NYMEX natural gas futures from the present to December 2023. These are prices that consumers of natural gas are willing to buy options to buy gas in the future. For example if you use natural gas to make steam or power or operate a heat treating furnace you might decide to secure an option to buy gas months or years in advance. When the settlement date of the contract comes up as a buyer you may elect to exercise the option or buy gas on the spot market depending on the spot price and the price paid out for the option.

(Data)

Look at the futures spread to understand the direction gas prices are going. Generally the trend is up, not drastically up, but steadily up. This is probably a reflection of expectations of moderate inflation in the coming decade and the gradual shift from coal to natural gas.

Inflation in the energy sector tends to amplify - first the commodity price increases, then the cost of adding production increases as the cost of steel and labor goes up. The past teaches us that we seldom get the balance right. During times of low cost we don't invest in new production fast enough and in times of high prices we tend to over build and prices collapse. Along the way cold weather, hurricanes, accidents and disruptions contribute to randomize the settlement prices for gas. Therefore, future prices five, ten or twenty years out are only important to projects with long time lines. In the case of the Alaska Gas Pipeline the price trend is favorable.

2) What about shale gas? Last week shale gas champion Chesapeake released preliminary 2010 operating results. Those result include disclosure of their hedging positions, namely that 96% of 2011 gas production is hedged at $5.84/MMBTU and 17% of 2012 gas production is hedged at $6.19/MMBTU (Link to Chesapeake Operational Results). Previously Chesapeake has indicated a target gas price of $6.00/MMBTU, and in April 2009 Chesapeake deferred production of gas when the price was in the $4.00/MMBTU range. Updated Link: (Chesapeake presentations)

Conclusion - Expect near term (1-2 year) return to $6/MMBTU gas prices. Someone is already buying options to buy Chesapeake gas at this rate and the evidence points to this price range as the sweet spot that promotes new discovery of natural gas and further development of shale gas fields. Fortunately it's a price range that will support building the Alaska gas pipeline.

Gas Markets Depressed

Article from Platts (LINK). Global economy has dragged gas prices down: