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Gas Abundance Triggers 'Butterfly Effect,' Say Experts

When North American operators successfully used technology to tap into unconventional onshore natural gas reserves, it triggered a shift in the markets that has upended activity around the world, but where it leads is still a question to be answered, two long-time market watchers said Thursday.

Speaking on the final day of the fourth annual Benposium in Houston, Bentek Energy's Jim Simpson, who also is vice president of Platts Power Group, said a "butterfly effect" will trigger major gas price increases by 2015.

As an example, the butterfly effect, derived by chaos theory pioneer Edward Lorenz, claims that a hurricane's formation is contingent on whether or not a distant butterfly has flapped its wings several weeks before, i.e., by unlocking unconventional gas, a storm of activity has been created across other sectors.

Today "low natural gas prices started a wave of other events," that in turn will lead back to higher gas prices, said Simpson. He pointed to the Department of Energy now considering several liquefied natural gas (LNG) export projects, which "makes complete logical sense, to build a bridge from a low-priced market to a high-priced market" in Asia, where prices for gas are about $15. "It seems too easy to wait until 2016 to wait for price impacts."

However, "Do we really need LNG exports to affect the price of natural gas?"

Simpson has "looked and thought a lot" about activity going on in other sectors affected by new supplies of gas. The technology that led to gas growth now has created a natural gas liquids (NGL) and oil bonanza, which in turn has created opportunities. Still, trying to put all of the commodities into an understandable formula proved difficult.

"I only understand Bcf/day," said Simpson. So he created a "U.S. energy exports Bcf/d cowboy math equivalent," a rough, "apples to oranges to pears" equivalent that uses 2011 as the zero basis, and he carried the equation to 2017 (2011 coal-to-Bcfe prices and supply/demand calculations were used).

Baking in average U.S. gas consumption, estimated growth in power generation and coal-to-gas burn figures, coal exports, residential/commercial forecasts, an average of 6 Bcf/d of LNG exports, and all the rest, the cowboy math boiled down to the United States being about 10 Bcf/d higher by 2017 than in 2011, said Simpson.

"At the same time, we're building export facilities," he told the audience. "Certainly at $2.50 we're starting to look at the horizon on how to burn more and who's going to burn it..."

Commodity producers "are creating options, which is what they should be doing, and it makes sense," said Simpson. But he said, "end users should be wary. Export infrastructure is like building a pipeline from low to high prices...

"The REX [Rockies Express Pipeline] and Rockies basis were a big deal," when the pipeline was built to carry constrained gas to thirsty eastern markets, but what happened? "Prices tend to equate to each other, and we're sort of in the same boat. Every commodity is in its own box...Add the boxes up, and it ends up a pretty sizable energy equivalent...Better connectivity means better pricing."

ConocoPhillips' Jim Duncan, who is the chief analyst of market research, agreed that the butterfly effect created by U.S. gas output is occurring in more than one place. "Things are occurring that we have seen, that we have not seen; opportunities are being presented that we have seen and that are being given to us, to prepare ourselves for the next wave."

The globalization of the economic world finally became a reality in the past decade, he noted, but now "we are struggling to balance ourselves in both plenty and stress. And juxtaposed against that, we all need energy.

"We've created a...world that requires massive energy. It's simple math...China has gone from nine cars per 1,000 people to 19 cars per 1,000 people...We produce 89 billion barrels of oil globally now, and we were 86 billion barrels before the great economic crisis. The energy curve has not stopped. It's been unabated.

"Every type of energy that we've possibly seen, every relationship that we've had, is going out the window," Duncan said of the new stature of U.S. gas. "Throw on top of that, new [drilling] technology, which isn't really new, which has brought supplies of a very valuable hydrocarbon from where we were going to have to get it to where are we going to put it and we have a market that's screaming..."

Now the markets are in "anticipatory expectation of what happens next," said the ConocoPhillips executive. "All expect the next shoe to fall...and it goes back to energy demand on a global basis. There's a disparity between base fuels in the United States, and the market is looking to the United States to be creative. In one way or another, it's going to happen.

"The forward markets know that a full boat, overload of natural gas just gets burned off. We do live hand-to-mouth with this market. We're trying to get the big picture here, but the forward market is only interested in what happens next."

U.S. gas production "in general is still brisk," said Duncan. But "shale gas has triggered the opportunity to look at the more affluent value chain associated with NGLs and crude oil. The big crucial question is, will NGLs and oil follow the natural gas path," in terms of becoming as oversupplied? And if the U.S. market were to become oversupplied in NGLs and oil, what changes would that trigger in world markets?

The "anticipatory factor" for natural gas "has a time limit on it...The trading world is expecting the market to do something different. Whether [the price of natural gas] goes up dramatically is not what we're saying. The balance or change is going to happen soon."

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