Relative to crude oil, the long-term outlook for strength in natural gas prices "has some significant headwinds," according to Tudor, Pickering, Holt & Co. LLC (TPH) Managing Director David Pursell. But while there is plenty to worry about in the gas patch -- oversupply, for one -- liquefied natural gas (LNG) imports are not among the threats to gas producers, he said.
Gas supplies are "stubbornly high," but the situation isn't likely to be exacerbated by more LNG coming to the United States, Pursell told attendees at Platts Oil & Gas Shale Developer conference in Houston last Thursday.
With about 10 Bcf/d of new LNG liquefaction capacity slated to come online, mainly in the Middle East, some fear much of that gas will come here. Not to worry, Pursell said.
For one, projects have a tendency to get delayed. "They're not coming on as fast as we thought," he said. But more to the point, he said, is the fact that the market is "pretty efficient."
Qatar will produce its gas because it needs to make money off the liquids, Pursell said. However, LNG cargoes for now will go to Asia and not the United States.
Asian markets will take their contracted volumes and pay about $10/Mcf. However, when extra cargoes become available, Asian markets will likely take those, too, at what they consider to be a bargain price at about $7/Mcf.
As for long-term gas prices in the United States, TPH thinks gas "is kind of a $6 commodity," Pursell said. To get the market to that higher price from where it is now, lay down some rigs. But when? "That depends on how long the E&P [exploration and production] community wants to continue to impale themselves," he said. "The E&P business is undisciplined and that creates market issues where guys go out and drill and the market hits them over the head and says 'stop.'"
If the rig count doesn't fall, there is significant risk ahead for gas prices, Pursell warned.
A lot of the drilling being done in the gas shale plays now is allowing producers to hold their leases, Pursell noted. And further, a lot of E&P companies were able to hedge their production at around $6 thanks to the previous strength of the natural gas futures strip. So the drilling will continue until the hedges roll off and/or leasehold is held.
"If I drill one well that holds the acreage to drill five wells in the future that hopefully will be more economic in the future," Pursell said. "...[I]t's like doing maintenance on a rental house in a real bad real estate market...you can't just let the house go away."
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