Horizontal drilling and hydraulic fracturing are unlocking the continent’s bountiful gas shale plays one by one, leading to a seismic shift in production economics — and prices will never be the same, a Calgary-based energy economist told NGI.
“[I]gnore what’s going on at your peril because…the power of scale and new technology has historically led to rapid adoption of the new and obsolescence of the old. I’m not necessarily suggesting that conventional gas is dead, but I am suggesting that if you’re waiting for price to save you, then you’re going to be waiting for a long time,” said Peter Tertzakian, ARC Financial Corp. chief energy economist.
Tertzakian thinks a Henry Hub price of $5.00-6.50 would keep low- and high-cost production in equilibrium and supply constant. Obviously, today’s prices aren’t there yet. (ARC Financial’s assumptions for this year are $4.45/MMBtu at the Henry Hub and C$4.60/gigajoule at AECO.) While gas prices could shoot up to $7, $8, $9 in the future, don’t look for them to stay there for very long, Tertzakian warned. Wise producers will be counting on about 6 bucks or less and exercising cost discipline, something Tertzakian said his countrymen in the gas patch haven’t always been good at.
“There’s sort of a denial that there is a substitution that is happening, particularly if you are a high-cost producer of any sort,” he said. “You should try to have the low-cost producer mindset rather than a lackadaisical mindset.
“The guys at Apple [Computer] don’t sit around and wait for the price of cell phones to go up. They’re constantly thinking every day, ‘how am I going to get more market share and how am I going to be the low-cost producer that offers a better product.’ And I’m arguing that same kind of mentality has to be bred into our industry.”
Not everyone is a believer in the promise of the shale plays, which some claim could offer 1,000-2,000 Tcf of reserves. Tertzakian said about half of the industry has gotten the shale religion, and that figure is growing. “I think there’s starting to be some capitulation,” he said. “Over the last six months I can sense it. Also, the policymakers are starting to believe it. The utilities are starting to believe it. There’s more to go, but I think as time goes by the numbers are going to prove it out. It’s not a question of whether there’s a lot of gas there; the outstanding question is at what price is it going to come out.”
While Tertzakian speaks of “the seven deadly variables” for producers — price, currency, policy, capital, costs, market share and the economy — the economist doesn’t see much threat to his assumptions of shale capacity and the lower ceiling he believes it puts on gas prices. For instance, the United States and Canada would appear to be on the cusp of regulating greenhouse gas emissions, but that’s not quite the near-term bullish news for gas prices that some might think, he said.
Renewables don’t have the scalability to meet power demand growth in a carbon-constrained world, so the obvious choice is gas-fired power, Tertzakian said. However, new gas-fired generation is far more efficient than traditional coal-fired plants, and the more efficient gas plants will also push older, less-efficient gas plants out of the market. “That dynamic is going to be a driver for greater gas demand, but it’s not going to be as fast as I think people think. In the next one to two years it’s not going to make that much difference. Maybe in three to five [years] it starts to make a difference.”
Don’t look to gas-fueled development in Canada’s oilsands for price support either. “To be honest, it was never really hugely significant in the first place, even in the heyday,” Tertzakian said.
And while exports of liquefied natural gas (LNG) from Western Canada (see Daily GPI, Jan. 14) will possibly come to fruition within three to five years, Tertzakian thinks they will merely serve as a “pressure valve” for continental supplies. “The sendout capacity isn’t going to be that large to make a difference, I don’t think.”
For the United States to develop gas liquefaction capacity (in addition to what exists in Alaska) to facilitate export to Asian and other markets, politicians, regulators and the industry will have to get the ringing of a 2003 speech by former Federal Reserve Chairman Allen Greenspan out of their ears, Tertzakian said. Back then Greenspan warned, “Today’s tight natural gas markets have been a long time in coming, and distant futures prices suggest that we are not apt to return to earlier periods of relative abundance and low prices anytime soon.”
And the domestic LNG regasification building boom was begun in earnest. In the last six years some believe that North America has transitioned from gas scarcity to plenty enough to share. However, more would need to be convinced. No. 2, Tertzakian said, Russia would need to put a gas supply squeeze on Europe to the extent that it creates a geopolitical reason to send U.S. gas overseas.
“Otherwise I think it’s going to be a little bit difficult, candidly,” Tertzakian said. “The United States has been talking about energy security for many years now. And then it wakes up and finds the equivalent of several hundred billion barrels of oil under its feet, and then to be convinced to try and sell it to others abroad…You never know. You export coal; why wouldn’t you export gas?”
When it comes to LNG imports to North America, Tertzakian doesn’t see the near-term threat to domestic supplies and prices from a flood of LNG imports of which some in the industry have warned (see Daily GPI, April 20). “I’m not convinced, to be honest with you. Some of the European storage levels are pretty low right now, and I’ve heard this story before, so I’m generally a contrarian on that.
“I wouldn’t dismiss it outright, but I’m not thoroughly convinced that’s going to happen. My gut feeling is that we’re getting close to the bottom of gas prices here at these levels but that one shouldn’t necessarily expect them to rocket up dramatically because of…domestic low-cost production.”
Tertzakian is the author of A Thousand Barrels A Second: The Coming Oil Break Point and the Challenges Facing an Energy Dependent World and coauthor of the soon-to-be published The End of Energy Obesity: Breaking Today’s Energy Addiction for a Prosperous and Secure Tomorrow.
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