Don't like today's low natural gas prices? Hang on, they will change, eventually, ConocoPhillips Gas & Power's Jim Duncan, manager of market research, told a Houston audience Thursday.
"Just hang on...Prices have never ever stayed down forever," Duncan said at Argus North American Gas Markets 2012.
In commodity markets, particularly natural gas, one thing that can be counted on is change, Duncan said. "This isn't your grandfather's natural gas market, but it probably is because we've gone full circle," he said, noting that gas prices through most of the 1990s were around $2-3. "Prices will never look bearish at the top of the market, and they never look bullish at the bottom of the market."
Production has been booming. According to data from the Energy Information Administration, U.S. Lower 48 marketed natural gas production reached 2.107 Tcf during December 2011, up 33% from the 1.586 Tcf recorded by the government agency in January 2007.
While producers have clearly responded to low dry gas prices by migrating to oil and liquids-rich drilling, associated gas has been a stubborn presence for the market to overcome. For every three to six oil wells the industry produces about the equivalent of one natural gas well worth of natural gas, Duncan said. As one gas-directed rig was laid down per week last year, eight oil rigs went up, making for generally flat gas production.
"As you produce more oil you're going to produce gas and the exponential change in the oil rig count is what's happening to gas, and it's going to affect the price of gas at least in the short term," Duncan said. "Gas rigs are slowly declining, but realistically, gas-equivalent rigs are pretty much remaining flat across the board. It's a hard calculation to do because most of the rigs have different characteristics in different fields, but that's pretty much what we're seeing."
While several producers are still seen to be outspending cash flow, that will have to change and it will, Darryl Rogers, a senior consultant with Purvin & Gertz, which was acquired late last year by IHS, told conference attendees. Still, response from the gas demand side is needed to balance the market. Prices are expected to remain weak for this year and well into next, Rogers said. For this year his firm is expecting gas prices to average $2.76.
"In the short term, we've got to see gas-directed drilling fall," Rogers said. The benefits of hedging are waning and are being offset by the uplift producers get from liquids production. "The weak forward market necessitates action to preserve cash flow."
While the gas market is about 4 Bcf/d oversupplied, it wouldn't take much to turn that around, Duncan said. "This is a dynamic, changing market, and it's going to stay that way," he said.
For instance, if the Environmental Protection Agency's new Cross-State Air Pollution Rule were to take effect tomorrow, it would create an additional 8.2 Bcf/d of gas demand in the power generation sector, Duncan said. "That would be a dramatic shift..." Duncan said.