After years of tight supply/demand balances, high prices and escalating production costs, the North American natural gas market has fallen into a "permanent shortage" mentality not seen for at least 30 years, but the market is actually showing signs of achievement as it transforms itself once again, Pace Global Energy Services said in a report.
Market bulls "have had plenty to point to in support of their pessimistic supply perspective," said Pace analysts. However, Pace's review indicated no shortage of global gas, but "perception will take some time to catch up with reality."
In the first six months of this year, the North American gas market had two "strong" indicators of the structure and operations of future domestic and emerging global gas markets:
According to Pace, the first lesson on location value and harbinger of future market structure occurred on June 4 in Opal, WY, where spot gas prices fell briefly to as low as 15 cents/MMBtu before "recovering" to around 80 cents by the end of the day. Scheduled Northwest Pipeline maintenance drastically reduced takeaway capacity out of the Rocky Mountains, which generated "a bidding war among gas producers for the precious remaining capacity."
However, the bigger picture, said Pace, is that the burgeoning gas production from unconventional gas has outstripped regional pipeline takeaway capacity and created a sustained glut condition behind the pipeline bottlenecks. And until the Rockies Express pipeline (REX) is flowing gas into eastern Ohio, gas prices could be depressed for "at least" another year.
"Call the early June price crash a leading indicator of the long-term shift in North American gas production patterns," said Pace. "The Gulf of Mexico and Western Canadian Sedimentary Basin, which together anchored the recovery of the domestic gas market in the 1980s and 1990s, can no longer be relied on to fill any deliverability gap," even if the drilling slump in Alberta is now more economic than related to resources.
REX is "just the next major reconfiguration of the North American gas pipeline infrastructure, bringing Rocky Mountain gas supplies to high-value markets in the Eastern U.S. The basis collapse in early June and the continuing penalty Rockies producers pay for inadequate market access should be seen as the economic signal and stimulus for coming change."
The other big "surprise" was the dramatic growth of LNG imports, particularly spot cargoes, early this year, said Pace.
"Lake Charles has been particularly busy, but traffic is reported up at all terminals, with April import volumes...running at a record 3.3 Bcf/d after a previous record month in March." LNG was "simply not in demand" in Europe or Asia.
"In all probability, this is not a one-off event," said analysts. "With new liquefaction coming on-stream in 2007 and beyond, a pattern has emerged that may represent the shape of global LNG commerce in the coming years...With a large amount of salt dome storage under development in the Gulf of Mexico, we see strong potential for this pattern to continue well into the future.."
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