Study Predicts $3/MMBtu Rockies Gas Prices in 2005
With the 12- and 24-month gas futures strips above $6.50/MMBtu, gas producers even in the Rocky Mountain region are sleeping well at night. But Rockies producers may be in for a rude awakening by this time next year when prices are likely to plummet to nearly $3/MMBtu, according to Denver-based consulting firm Bentek Energy LLC.
Bentek's new multi-client study titled "Catch The Wave -- Risks and Rewards in the Expanding Rocky Mountain Gas Market," finds that high gas prices have driven substantial production and drilling increases in competing western basins and that gas-on-gas competition will drive prices sharply lower next year.
The study foresees as much as a 50% price drop for Rockies gas despite the introduction of El Paso's new Cheyenne Plains pipeline this month between the producing basins in Wyoming and Colorado and markets in the Midcontinent and Midwest. Cheyenne Plains will provide substantial new takeaway capacity out of the Rockies and was expected to put Rockies prices more in line with benchmark prices at the Henry Hub.
"We were quite surprised by study findings that Rockies gas prices could be much lower by this time next year, perhaps down into the low $3.00/MMBtu range," said Bentek President Porter Bennett. "We expected that the new pipeline capacity out of the Rockies, providing increased access to Midwest markets, would improve the market for western gas production. Instead, any improvement in market access has been overshadowed by dramatic increases in competitive supplies from new production in West Texas and Oklahoma."
Bentek Managing Director Rusty Braziel said that this year there has been a surprising reversal of production declines at basins in the Southwest and Midcontinent. "Although it is not the result that you would expect, it is hard to argue with the numbers," he said in an interview with NGI. "What has really happened is that production from the Anadarko, Permian and other basins [in that region], which people thought was dropping off, has actually been increasing. These high prices that we have right now have really kicked up the in-fill drilling. And if you add that to the gas that's in storage right now, once we get past the winter -- unless it's [colder than normal] -- it will be tough to stay out of the $3 [prices]."
That conclusion and others are based on a detailed analysis of Rocky Mountain natural gas supply and demand, which includes daily information from 92 different pipelines and storage locations, according to Bentek. It also comes from a basin-by-basin review of production trends and forecasts, utility-by-utility analysis of demand down to the sector level, and an assessment of specific market risks and strategic implications, Bentek said.
The study looks at new pipeline capacity in the West, including the expansion of Kern River Gas Transmission and the construction of Cheyenne Plains, then evaluates the potential impact on that capacity from a reversal in production declines being driven by increases in drilling activity throughout the West and Midcontinent.
"There's going to be a supply problem when we reach this time next year, and it's not going to be the same kind of supply problem that we've been having; it's going to be an oversupply problem," said Braziel. "The [Henry Hub] is going to be somewhere in the $3s" as well, he said. "We're saying that the supply overhang will impact the national market and impact the Rockies market more so."
The study also examines the potential impact of the "LNG wildcard" on long-term supply demand balances. Bentek predicts that while the current level of LNG imports is essential for meeting U.S. demand over the next two years, almost all of the new LNG terminals that have been announced would be surplus to long-term U.S. supply requirements.
The Catch the Wave study evaluates the major developments impacting the market for Rockies natural gas through 2010, said Braziel. For a free summary contact Braziel at (888) 251-1264 or go to www.bentekctw.com.