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Shale Boom: Supply, Prices Tough to Call

Technology advances have driven the shale boom and the industry's ability to analyze markets, but it isn't any easier to answer the question of how long abundant supplies and low prices will characterize the natural gas industry. That was one of conclusions from three experts on a panel at the LDC Forum: Rockies & West conference on Tuesday in Los Angeles.

Jerry Swancoat of Deutsche Bank Energy Trading offered insights on supply; Jack Weixel, Bentek Energy's director of client services, tackled demand; and David Givens, head of power and gas services at North American Argus Media Inc., offered a sobering look at the future of gas in California's jumbo market. However, none of them could clearly answer the question about what the future holds for domestic gas supplies and prices, which are experiencing near-record highs and lows, respectively.

Noting that North American gas right now is three to five times cheaper than the other major regions of the globe -- Europe, South America, Middle East and Asia -- Swancoat said "not only is shale booming, but it is coming at the expense of other gas." Much of the added shale gas supplies are coming as replacements for gas from the Gulf of Mexico, which peaked at about 10 Bcf/d a few years ago and now averages about 6 Bcf/d, he said.

Five years ago, the Gulf supplied about 20% of U.S. gas; today that percentage is 9%, Swancoat said.

Like other speakers at the LDC Forum, Weixel sees the power generation sector as the leading source of future gas demand to keep pace with the shale bonanza. He does not anticipate much growth for gas in the industrial sector, even if the current push for gas to liquids (GTL) plays out.

"Right now, everyone wants to be in oil; there is no money in gas," said Weixel, adding that the crude oil-to-gas price ratio is at an all-time high of 22.8 to one. "If we extend that forward [looking at the forward prices of each fuel] we see the ratio coming down."

However, that begs the question of whether the lower ratio is a function of higher gas prices or oil prices dropping as they have in recent weeks. Weixel thinks it is going to be a combination of both, and the ratio is important in helping producers decide what they want to go after: oil, wet gas or dry gas.

In looking at the options producers have for drilling and the fact that the rate of new rig construction is not slowing down, Bentek has concluded for the near-term there will be no slowdown in drilling, but it is a question of what the drilling is for: oil, liquids or gas.

Zeroing in on California and the West Coast, Givens said, "we're not looking at a lot of demand growth." Renewables in California, in fact, are cutting the gas load in the state, he said. "The variability of wind power also means we are going to have more cycling of gas generation."

The gas industry is not thought of favorably by policymakers in Washington, DC, right now, Givens said. "That [spotlight] belongs to renewable energy," he said.

Givens said driving reduced gas demand in California is "broad, but not universal, economic weakness." Regardless of a whole host of factors, Givens said California is a 6 Bcf/d gas market and it is going to stay at that level for some time.

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