Will the natural gas industry have excess supply and delivery infrastructure frantically searching for demand in the next decade or is the oversupply not what it seems? The competing views came from two industry experts at the LDC Gas Forum: Rockies & West meeting in Los Angeles last Tuesday.

With supply, demand and other drivers in flux due to technological, economic and regulatory factors weighing in, the potential growth in gas demand in the next 10 years is extremely broad, ranging from 8 Bcf/d to 31 Bcf/d, according to Colorado-based Ty Harrison, chief strategist for Societe Generale Energy (SGE).

In response to a question, Harrison said if the high end prediction materialized, that is 31 Bcf/d of additional demand added on to the estimated 66.5 Bcf/d this year, the industry could be looking at wholesale gas prices going up to the $10/MMBtu level. “Generally with that much demand growth, we’d be moving toward a 100 Bcf/d overall gas market,” he said, noting that such growth would tend to cut the long-term supply life from 100 years down to 68 years for current gas reserves.

“You could crack 100 Bcf/d of demand with $6 gas in today’s cost structure. But the question is what sort of pressure does [100 Bcf/d] put on the supply chain in terms of the number or rigs, people, equipment and other factors? So if we were running toward that number in 2020, we would be looking at a number closer to $10.”

Price volatility could come a lot quicker, according to Jim Duncan, chief analyst and commodity market strategist for ConocoPhillips in Houston. Although a shale-produced natural gas surplus remains, it is at a lower level than many expected and thus a couple of drivers could send prices back into a period of volatility, Duncan told the LDC Forum.

Duncan explored “What’s Next for the Energy Space?” as a second-day keynote speaker at the western gas conference. He labeled himself as “bearish” on the natural gas market.

Placing the current level of U.S. oversupply at 2.75 Bcf/d, he characterized this as far lower than he and many others in the industry had predicted early in the year, expecting the number to be 4-6 Bcf/d, given the continuing shale gas boom.

“This is what scares me; if you stack up all the gas demand pictures and do the pluses and minuses on imports, you get 2.75 Bcf/d oversupply,” Duncan said. “The talk of shale makes everyone in the country think that we are way oversupplied. I have heard numbers of 4 Bcf/d and 6 Bcf/d, and the reality is that we are not exactly that much oversupplied. It would not take much to throw us out of balance.

“The signposts have been appearing in the last several months,” he said, noting the continuing shift of drilling rigs from shale gas to oil work. “The rigs have been steadily moving away from the gas production toward oil, and that is a problem if you think you’re going to be oversupplied. So, to me, this seems like 1998-99 all over again.”

In the near term, Harrison painted a picture of rig counts declining while production increases, prices remaining relatively stable and more rigs moving away from gas to oil and natural gas liquid (NGL) plays. Gas will remain in an oversupply mode relative to demand, he said.

Longer term, Harrison, who focuses on North American gas market fundamentals, views the possibility of a 100 Bcf/d U.S. gas market by 2020. That would have a profound effect on everyone from producers to end-users to regulators, he said.

Despite a 45% drop in the rig count since 2008, gas production has continued ever upward, Harrison said. “We keep seeing continued improvements in efficiency in all of the shale gas basins” whether they involve hydraulic fracturing (fracking) or traditional drilling.

“Our analysis shows that there is a ‘break-even’ point regarding rig count that is materially lower than where we are today,” Harrison said. “We are at a little more than 900 rigs now, [and] my estimate is that 700 or 750 rigs [operating] is really what the market needs to stay flat, or stop growing.”

Given that there is the oversupply with adequate resources in the ground that could be targeted, what was viewed as flat demand raises two interesting trends to monitor relative to rig counts, Harrison said. One is the drilling capital budgets that companies announce for 2012, and the other is how much movement from gas to oil or NGL production takes place.

A large part of the potential growth in demand to get close to a balance with production is the electric generation sector, and there the drivers are what Harrison called “largely regulatory factors.” These include renewables, the more stringent cross-border Environmental Protection Agency (EPA) air emission rules and gas prices as they influence a resurgence of industrial gas use.

“The most significant near-term catalyst would be the cross-state air pollution rules that are scheduled to go into effect Jan. 1,” Harrison said. “If they go into effect our estimates indicate it would boost power demand in 2012 by roughly 0.8 Bcf/d. In our view and a much broader group’s view, the tougher standards can only be met at the margins by switching from coal to natural gas to a greater extent than we have seen so far.”

Harrison noted there are challenges to the proposed EPA rules from states and companies suing the federal agency, but if the rules are implemented as scheduled, a big push in gas demand is expected to result. Coal to gas switching is a major issue going forward, he said, zeroing in on between now and 2015.

“Somewhere between 25 and 30 GW of coal-fired generation will need to be retired by 2015, and natural gas will pick up the lion’s share of that,” Harrison said. By 2015, he thinks there could be another 3-3.5 Bcf/d of gas demand from the move away from coal-fired generation to natural gas-produced power. “What the market is essentially trying to do is keep natural gas as the cheap, low-emission source of energy in the market.”

But Duncan warned that the nation today is more dependent on natural gas. Following the Japanese tsunami earlier this year, which knocked out nuclear generation plants, gas prices rose, he noted.

Duncan said there has been a decline of about one gas rig each week, while about eight oil rigs are being added weekly with the trend remaining stable through the most recent four-month period this year.

“In the last 12 months when we were worrying about nuclear and other issues it had a direct impact on natural gas; prices went up, but it wasn’t noticed as much because the prices still stayed relatively low,” Duncan said. “I believe natural gas-fired power is going to be one of the waves of the future.”

Fracking also is an issue to watch, said Duncan. ” If you take away fracking, you go back to depending on traditional drilling. People need to remember the last time we were focused on that source of production (2006-07) was the precursor to some widely volatile price swings that took the nation up to $14 gas at the midpoint of 2008.”

Duncan is also concerned about the trend for many producers to switch to plays rich in natural gas liquids and oil because of the low prices for dry gas. “If everyone switched, for gas and oil to be equal, a barrel of crude would have to be about $16 to $17/MMBtue,” he said, noting that is the crossover point for crude oil.

“The reality is that the more attractive product is anything associated with crude oil. And if we switched, that will at least be another signpost we put out. And the reality is that is what we see. I speak to producers and that is what they tell me they are doing incrementally.” Another “reality,” he added, is that “natural gas prices can be volatile — all energy can and will be volatile.”

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