Natural gas prices need to be “at least” $9/MMBtu to maintain current North American supply available to the United States, an energy analyst suggested Monday.
The growth in gas supplies available to the U.S. market will be “essentially” because of liquefied natural gas (LNG) import growth, analyst John Gerdes of SunTrust Robinson Humphrey/the Gerdes Group wrote in a note to clients. “Given that the total change in U.S. gas market supply over the next few years is unlikely to keep up with the projected growth in gas-fired power generation, industrial demand rationalization appears necessary to satisfy higher value spacing-heating (storage) and power generation gas demand.”
Besides stimulating more North American gas drilling, a $9-plus gas price “should also serve to rationalize the industrial gas demand requisite to providing adequate gas supply for higher value heating and power demand,” he said.
North America’s gas supply was “fragile,” said Gerdes. He noted that incoming supply data from the Energy Information Administration “appear to confirm that relatively stable U.S. gas drilling activity may at best generate stable U.S. onshore gas production. If that’s true, and given that the E&P [exploration and production] industry is free cash flow negative 15-20% in a $7.50 gas and $62 oil price environment, markedly higher energy prices [are] seen necessary to induce greater drilling activity.”
In 2008, even with an increase in operating U.S. gas rigs and a 10% rebound in Canadian gas well completion, incremental gas supply available to the U.S. market would only marginally improve without LNG, Gerdes wrote. The 2007 production outlook assumes a 7% deterioration in well productivity, which Gerdes said reconciles with the trend in U.S. gas well productivity in the last 10 years.
Canadian gas imports are expected to drop by “just over 1 Bcf/d” this year, Gerdes wrote. “Significantly lower Canadian drilling activity in ’07 accelerates decline in Canadian gas exports to the U.S.. Since last fall, Canadian drilling activity has slowed over 20% year-over-year.”
The analyst noted that Canadian producers have experienced even more acute oilfield service cost inflation than their U.S. counterparts in the last few years and consequently, Canadian gas producer margins are about 20% weaker than those of U.S. gas producers. “Our potentially conservative expectation of 15% fewer gas well completions this year assumes stronger drilling activity later in the year given at least 20% oilfield service cost deflation.”
The “relative attractiveness” of the U.S. gas market will result in strong LNG imports, however.
“Since early March, the dramatic weakness in the European gas market and, to a much lesser degree, the Far Eastern market, has significantly increased the attractiveness of landing LNG cargos in the U.S.,” wrote Gerdes. “Current sub-$4 U.K. gas prices and roughly $7 Japanese gas prices imply the U.S. market is the most attractive global destination for excess LNG cargos.”
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