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ICF Sees NatGas, Midstream Opportunities in Oil Price Plunge

The collapse in oil prices has put the brakes on some natural gas production and midstream operations, but opportunities exist for companies looking to the long term, according to ICF International.

ICF's Ananth Chikkatur recently published an ICF white paper, Collapsing Oil Prices: Strategies and Opportunities. Chikkatur, who focuses on natural gas markets in the firm’s energy, environment and transportation division, discussed the operating environment during a webinar with Kevin Petak, vice president of gas market modeling.

Natural gas prices are forecast to be "relatively low" for the next 12-18 months, until demand growth is seen from liquefied natural gas (LNG) export projects and petrochemical expansions post 2016, Chikkatur said. "Prices are going to start to rise and reach around $5.00/MMBtu by 2020."

Projects along the Gulf Coast have seen a lot of activity given that several rely on long-term tolling agreements. However, "integrated projects such as those in British Columbia, or other regions and countries where gas resources are developed primarily in support of LNG projects, are more likely at risk."

Because international buyers, particularly in Asia, have less incentive to switch to gas because of low oil prices, global LNG demand should suffer, he said. "They will be less likely to deviate from their current oil-indexed contracts. In general, North American LNG projects with long-term contracts or already under construction will have first-mover advantage. Project developers need to get contracts in place quickly and develop a gas supply portfolio that demonstrates competitive economics for LNG buyers."

Natural gas demand "use could grow as high as 50% over the next 20 years, but there are indeed risks, particularly for LNG. Natural gas liquids [NGL], especially ethane prices, are forecast to be relatively low in the near term, and market development for liquids is "fairly uncertain," even though "production is quite important to actively support producers."

In general, ICF analysts "certainly see the trend for oil prices to be higher than today," Chikkatur said. "Supply changes are not necessarily the main story. Really, demand is the key," he said, mirroring comments by other market watchers (see Shale DailyFeb. 19). "What China does and the level it grows is quite critical for global oil markets. Europe has been in doldrums for several years, and we'll have to wait and see...

"At ICF, the trends suggest that in the long term, West Texas Intermediate should average $75.00/bbl. It's likely to fluctuate widely around the long term trend in all scenarios, and even lower prices are possible, particularly in the near-term. ICF does not anticipate a sustained rebound to $100/bbl."

One of the results of dropping oil rigs is the loss of associated gas production, Chikkatur said. The effect varies across the onshore, with gas production from Appalachia likely to grow "even under the sustained low price environment. However, growth in gas production will decline in the Permian, Bakken and Eagle Ford basins."

Taking the least amount of risks is the name of the game today. When gas prices fell in 2009, producers pulled up rigs and moved to better prices in their wetter and more oily patches of the onshore. Now the reverse could happen.

A "sustained period of low oil prices will likely shift production toward drier portions, increasing gas-directed drilling" to meet the growing demand for upcoming LNG exports and power generation, he said. Producers with dry gas assets, like in the Marcellus Shale, "may see their value increase over time if low oil prices persist. Such changes can have dramatic impacts on the already strained midstream infrastructure in a number of shale areas."

Associated gas production from oil wells is about 20% of North American production, he said. However, because each basin produces at different levels, a drop-off in oil activity would impact some areas much more than others. No significant impacts, for instance, are expected in Appalachia gas plays because oil prices have little effect. "It's the same with the Rockies too," Chikkatur said. "There's some associated gas, but overall, Rockies growth is seen remaining flat or growing as we thought" when oil prices were closer to $100/bbl.

"The real big changes" on the oil slide are seen in the Bakken and Eagle Ford shales, and from the Permian Basin, declines already noted by a long list of operators. "Our overall view of natural gas production accounts for as much as 20% of North America's gas output," according to Chikkatur.

Because operators don't drill for NGLs alone, production growth will continue even under sustained low oil prices. "If oil prices remain at $60/bbl for an extended period of time, ICF projects that total NGL production would increase from 4.2 million b/d in 2015 to 5.2 million b/d in 2020.

"In comparison, if oil prices rebounded back to $100/bbl very quickly, NGL production by 2020 could be 5.7 million b/d. In any case, liquids output this year "is likely to exceed that of 2014, as pre-decline development activities are completed and new production comes online."

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