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Bentek CEO: Prices to Fall by Year's End -- But Spikes Sure to Follow

More than enough natural gas is surging through pipelines and into storage today and barring any weather disruptions, prices should "significantly come down by the end of the year and stay down," the CEO of Bentek Energy LLC said Friday. However, the gas supply/demand picture remains a "vicious cycle," and another price spike will surely follow -- and sooner than some might think.

Porter Bennett offered his insights Friday morning to an overflowing crowd on the final day of the Rocky Mountain Energy Epicenter, cosponsored by the Colorado Oil & Gas Association and the Rocky Mountain Section of the American Association of Petroleum Geologists. In May Bennett saw no short-term relief for double-digit gas prices (see NGI, May 26), but burgeoning production growth from the Rockies and across Texas likely will depress prices by the end of the year, he said.

"Price signals work," he said. "We're doing a great job as an industry" to supply gas, and in the process the Canadian shortfall in gas imports has been overcome. In addition, "we're moving LNG [liquefied natural gas] out, which is a good thing because it's the most expensive gas we can get." However, it's "not straightforward." More capacity has to be moved from the Gulf Coast region, more gas has to be moved out of the Rockies to the East Coast. "The problem is, it's a vicious cycle. When is it too much and how do you time it?"

"We're at risk of taking what is a very positive production growth story, which will lead to lower prices for consumers, and turning around and getting another spike," Bennett said. "Each one of those spikes gets taller, gets harder to fix. This is a very serious issue and we have to figure out how to communicate with the government to get them to understand what the hell is going on."

The gas industry, he said, is "at one level one of the most simple industries there is...Economics 101, supply and demand. It works very well in the natural gas business. Natural gas pricing is cyclical, reflecting the supply and demand balance. What goes up, comes down." But when "demand exceeds supply we have a price fight. It works very, very clearly and it works for a long time. But where we are in the country right now, U.S. production is clearly responding to the drill price signal. I'm not sure in my career gas has ever grown at the rate it is now.

"We're at 8-10% growth right now," said Bennett. "That's just a crazy number to think about in any context. The $64,000 question is why it's not showing up in storage. Well, we're not importing any LNG right now; it's not coming. I look at that as a good thing. Cargoes are high priced. As little LNG as we get from foreign sources, the better. That means not paying those prices. Second is, Canadian imports are way down. This is a sustained trend. [And] we've seen more liquids extraction. The gross withdrawals ratio has increased over the last couple of years."

In addition, there were a "number of new storage facilities being built in the Gulf that are injecting cushion gas, and that's not in EIA [Energy Information Administration] numbers. And most important, intrastate pipeline clients are saying that they are moving more gas to industrial clients, to fertilizer manufacturers on the Gulf. There's a huge market for fertilizer outside the United States..." That gas is not showing up in storage, he said.

A tremendous amount of gas is being produced not only in the Rockies but "in most major U.S. basins," he noted. Through June 30, Bentek research estimates that Rockies production through the Cheyenne system is "up 900 MMcf/d" from a year ago. In the Southeast supply area basin, output is estimated to be up 3.2 Bcf/d.

"The only ones down are the Gulf of Mexico and the San Juan Basin," he said. "The [San Juan] basin being down is a certainty, but the Gulf of Mexico may turn around. Independence Hub went out for six weeks, but if it stays up, I suspect we'll see a flat to slight gain by the end of the year."

No one forecast that so much gas would be coming from so many places -- and that has put a burden on infrastructure, he said.

"In 1980, there was no production in the Rockies on a relative basis. Most of it was on the Gulf Coast, in Louisiana or Texas, in the Gulf of Mexico. By 1990 things had begun to change. Producers moved into the Rockies; there was growth in the Gulf, but it was the beginning of the [Rockies] Overthrust. By 2000, with the Powder River Basin, there was coalbed methane emergence, San Juan, and we began to see the Rockies take off. On a pipeline map, we wouldn't see much of a difference between then and 2000...there had been very little change in U.S. pipelines."

By 2007 there were two main areas of production, "with the Rocky Mountains on one end of a barbell and the East Texas/Fort Worth/Arkoma on the other end," said Bennett. "Those two are accounting for a much larger percentage of total supply, but pipelines don't have the infrastructure to take the gas out. We're getting there, but they haven't been able to do it yet."

There is "a lot more gas relative to demand," and in the Rockies, export capacity is expected to remain tight. "When you look out into the future, you see the Rockies experience last year," when prices fell to levels at some points below $1/Mcf for a period. More pipelines are coming online over the next few years, "but between now and then, it's not going to be petty out here. We'll have a lot more gas than takeaway capacity. There will be a repeat of last summer pretty dramatically. The difference was, last summer was a 'summer event.' By the end of next year, this basis problem may affect winter prices as well."

El Paso Corp.'s Ruby Pipeline project, which could begin service in June 2011 and carry gas from the Rockies to the West Coast (see NGI, June 30), "will help a whole lot, but only for a short while...three or four years. That's what I said about REX [Rockies Express Pipeline], and I'm comfortable with that statement.

"This is predicated on the notion that the number of wells we're drilling now stays the same and the productivity per well stays the same," he said. "If we increase the drilling cycle or if initial volumes increase, both of which have been going on by the way, then we'll have more of a gas event without drilling more wells. More pipelines might solve it, but that's a relatively risky thing to say."

In the next few years there may be "abundant rain in Spain, or other things that diminish the need for LNG in Europe. And there's nowhere else those boats can go, and so they drop down into the Gulf [of Mexico]. When cargoes land, they'll kick the you-know-what out of the price. The point is, you've got a whole bunch of gas that could get locked in the Gulf that will have no place to go. Henry Hub is in the middle of that, and there's bound to be some collateral damage to Nymex [New York Mercantile Exchange] prices as well."

More gas will drive down prices, which is "a good thing for the consumer, what the politicians would like us to do. But like all good deeds, this has to get punished, I guess. But a whole lot of factors could disrupt the drilling process, jeopardize pipeline projects...And it's a huge investment for lots of people that have sunk tens of billions into production out there...We need to improve communication with various regulatory bodies. This is absolute testimony as to why it's important."

The gas industry, he said, "is in my estimation one of the truly unreported great stories of the last five years. Think back to 2000, 2002, when there were seemingly unending reports that we didn't have enough natural gas...In fact, industry not only belied those statements, but it is on the cusp of getting to the point of a surplus of gas that should start bringing prices down to consumers...This is a tremendous story. But it's not the same as it was in 2005, or even in the 1990s. In those days, [we wanted to] just bring more gas out of the ground, build pipes, move forward.

"Now we're bringing gas out of the ground where it didn't come out of the ground before. We need more pipelines, more infrastructure; the whole industry is changing, which makes the accomplishments of the last five years even more significant."

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