Despite the drilling progress that has been made and the liquefied natural gas (LNG) import terminals that have been planned, the gas supply picture remains uncertain, and over the next few years natural gas markets can expect continued price volatility, speakers at GasMart 2006 said Thursday. LNG supply will remain tight until the end of the decade, and Gulf of Mexico, unconventional onshore and LNG resources all will be needed to meet growing industrial and power generation demand.
Scott Smith, Lukens Energy Group vice president, said that in the near term, prices will remain volatile. "We've seen the market behave such that it's very closely tied to oil and oil volatility... The question is whether that link is maintained over time. Bottom line, I think..., over the next few years we're going to be at a fairly high volatility level. Until our supply infrastructure levels out... it's hard to understand how that volatility is going to decrease."
With Canadian imports and production from conventional basins not what they used to be, the industry is counting on LNG, unconventional onshore basins and technology-driven production improvement in the Gulf of Mexico. But the supply won't come overnight.
"It's no secret that LNG supplies on the near-term and going out to probably 2010-2011 are going to remain tight," said Rudy Adamiak, SUEZ LNG senior vice president for supply and terminaling. "There are new projects coming on, but the ones that come on line first will not be tied to firm markets. They typically will be sold under monthly deals as is typical for the Gulf Coast area. And I think we'll see quite a bit of volatility yet over the next three or four years."
LNG has probably been getting more media attention than unconventional resources (gas from shale and tight sands, and coalbed methane), but the new era in gas prices has brought an abundance of activity to a number of plays. Gas shales in the Arkoma, Anadarko, Palo Duro and Permian basins have garnered a lot of interest. Tight gas sands in the East Texas, North Louisiana and Anadarko basins, too. And coalbed methane is particularly hot in the Arkoma/Cherokee Basin and the Greater Green River, said Ray Harlow, CEO of Maverick Oil and Gas.
Right now, though, the industry is resource constrained in its efforts to grow unconventional production. Asked how well the oilfield service sector is responding to demand, Harlow replied, "Not very well, is the bottom line. I think there has been a [reluctance] on the part of the major suppliers to really ramp up their capacity."
Harlow said that the needs of producers in the Barnett Shale are being met for the most part. However, "in some of the new areas, like Arkansas, for example, that is not the case. Some of the suppliers at least are taking a wait-and-see attitude... The biggest problem we have right now is not rigs, believe it or not, it's frac'ing capacity. It's being expanded at a very slow rate, much too slow in my opinion. I think this situation will persist over the next 18 to 24 months.
W. Reid Lea, W&T Offshore executive vice president, said his company is getting the equipment it needs; however, suppliers have a lot of pricing power.
"I hate the current rig rates," Lea said. "They are unrealistic, in our opinion, and we don't think they will be sustainable." Despite not signing long-term contracts for rigs, he said W&T is getting the equipment it needs, with a bit of a wait. "We don't like the prices were paying for them, but rigs are available."
Despite high costs, at least for now, Lea made the point that the Gulf of Mexico is still a more than viable natural gas source, not to be overlooked. "There are a lot more reserves remaining in the Gulf of Mexico than most people think of."
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