While near-month futures spiked to an all-time highs last week, and the 2006 strip standing at $11.93, two analysts predict the gas market will scale back down by about 33% next year to range between $7.15 and $8/Mcf after the hurricane recovery is complete. Prices, they said, should remain just above $6 over the long term.
It's a sharp drop from the current market environment, but it should still allow independents to continue their focus on long-lived assets, especially unconventional gas resources, said Lehman Brothers' Jeff Robertson and RBC Capital Markets' Joe Allman. The two analysts spoke Wednesday at the annual meeting of the Independent Petroleum Association of America in Houston. Both said their companies are forecasting oil and gas prices will remain volatile at least through 2006.
"What will carry the day in terms of prices is not what the long-term prices will be but where is the market," Robertson said. "The cost of doing business is going up, and we do believe the cost of adding reserves has increased steadily. In 2006, costs will continue to rise." Lehman's 2006 price deck is currently $8/Mcf.
Robertson said the costs associated with Hurricanes Katrina and Rita led to a sharp spike in gas prices during September, and at least through the first part of 2006, the aftermath from the storms will pressure prices. However, over the long term, oilfield service costs will be up, and finding and development costs will continue to rise.
In agreement, Allman told the audience, "we think high natural gas prices are here to stay." Through the winter, several weather forecasters are predicting a cold winter in the Northeast. However, because the Northeast uses more heating oil than the rest of the country, the "most important region to watch for natural gas prices is in the Midwest. This is the area to watch."
"Prices will not collapse," said Allman. RBC's latest gas price forecast is $7.55/Mcf, but Allman said that price "may need to be raised. In the long-term, we see prices of $6 to $6.75." He said at some point, gas could settle at a $4.50 floor, but "we're never going to see $3.50 again."
Eventually, said Allman, rising imports of liquefied natural gas (LNG) to the United States "will come to the rescue, but the Alaska pipeline is 10 years out...the Mackenzie [Delta] pipeline is at least that long...The rig count is up, but production is down. And the majors are not investing in domestic gas...they are more focused on LNG...For this reason, natural gas is not going back to four bucks or even five bucks."
RBC also is forecasting more LNG imports, with up to 10% of U.S. supply coming from LNG by 2010. Allman noted LNG imports totaled 1.8 Bcf/d in 2004, and this year are expected to peak at about 2 Bcf/d. By 2006, imports will rise to 2.8 Bcf/d, and then will rise to 4 Bcf/d by 2007, he said.
"Existing LNG facilities are not yet at capacity," said Allman. "What we will see this winter are some spikes, which usually occur in the summer." In October, he said LNG imports to the United States will top out at about 2 Bcf/d, with "more in November and more in December."
Although the buzzword continues to be unconventional gas, consolidation by exploration and production (E&P) companies also is expected to be a hot issue into 2006, said Robertson. "There are a lot of companies with a lot of cash. In the near term, inventory is important," and companies holding "a lot of drilling opportunities" are more attractive to some of the larger independents and majors.
There are "some nice prospects" in the deepwater Gulf, and in the "underappreciated and unexploited" Appalachian region, but overall, "long lived assets are in vogue. Acreage is king."
Robertson said he also has "started getting a lot of questions on oilfield services." Because E&Ps can't add capital onshore in U.S. drilling, and because they are trying to be more efficient with their budgets, investments in oilfield services, such as rigs, is one area of interest. He noted Chesapeake Energy Corp. is the largest shareholder of Pioneer Drilling, and it also has made its own rig investments to lower the costs of drilling.
Noting the recent industry criticism by members of Congress, and the possible imposition of a windfall profits tax, Robertson said, "what seems to be missing is that this is still a hard business. We really think this is a tough business even if commodity prices are high."
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