It’s no secret that the natural gas industry is long on supply and, thanks to the recession, currently short on market. Complicating the picture are the shifting geography of supply sources as producers target unconventional basins, and pipeline capacity constraints, which are expected to periodically push prices down further and put a ceiling on high prices, the founder of Bentek Energy LLC said last Wednesday.

The impact of the technologies that unlocked the shale plays and brought prices down is only beginning to be felt as a rerationalization of the natural gas supply stack is under way, Bentek President Porter Bennett told attendees at Intelligence Press Inc.’s GasMart 2009 in Chicago. Demand growth is needed for the long-term health of the industry, he said. For now, though, look for more shut-in production. “Production is the only way you balance this,” said Bennett. “You’re going to have to shut in more production.”

Looking back it’s almost humorous that there was a time when some thought gas supply was running out. However, from 2005 through 2008 the compound annual growth rate of production from the Rockies was 6.3%; from the Midcontinent it was 1.2%; from Appalachia it was 7.4%; from the Southeast it was 3.7%; and overall it was 3.8%, Bennett pointed out. Rigs are dropping like flies, but the decline in activity is offset somewhat by producer efficiency gains. Producers also are focusing efforts in the most productive basins. While Canadian imports are down, so is U.S. demand for gas, a decline of 4.7 Bcf/d so far in 2009, Bennett said. Storage is “very full,” of course.

The Rockies Express Pipeline (REX) is full, too, and despite weather-related delays the last leg of the project is plodding eastward to ultimately deposit its cargo in Ohio starting next month. Trouble is, there is not adequate takeaway capacity out of the region to handle all of the 1.8 Bcf/d of gas REX will carry to Ohio. “Rockies gas can get to Ohio but that doesn’t necessarily mean it can get to the Northeast market to alleviate the basis problems or the basis blowouts or the price blowouts that happen in the Northeast on a cold day in the winter,” Bennett said.

This will create pushback on supplies trying to make their way from the Gulf Coast region to serve eastern markets (see NGI, May 18; Jan. 19). Additionally, gas leaving the REX system before Ohio via interconnects along the way will put pressure on supply from the Southeast.

Liquefied natural gas (LNG) imports into the Gulf of Mexico are a wild card. More cargoes are coming to the United States this year, and Henry Hub and UK’s National Balancing Point (NBP) prices are in near parity, Bennett noted. While U.S. storage is bursting, stocks in Europe are depleted. Europe might need regasified LNG to refill storage; however, gas demand in the region is way off, too. While the United States doesn’t need LNG to balance its market, Europe does. “So theoretically they’re going to have an incentive to pay a little bit more than we do,” Bennett said. “We’ll see how it plays out.”

In Bennett’s view, the Southeast supply area is “the heart of the U.S. gas industry.” It’s due for a bit of angina as the region is facing the potential for 6-8 Bcf/d of gas-on-gas competition if Bennett’s expectations are correct.

He noted that 15 projects are in the works to carry a combined 8.7 Bcf/d from the Arkoma Basin, Fayetteville and Barnett shales to Carthage, TX. Another eight projects are slated to carry a combined 7.3 Bcf/d from Carthage to the Perryville Hub in northeast Louisiana. Then another nine projects will be vying to carry 6.4 Bcf/d from Perryville to Transco’s Station 85, the gateway to premium markets. However, Bennett, noted that “7.3 doesn’t fit into 6.4,” which will create a situation similar to what will happen when REX deposits its cargo in Ohio, he said.

“If all that capacity is full, you’re going to have about 5 Bcf/d of gas-on-gas competition in the Gulf over the next period of a year or two,” Bennett said. “But it’s a little bit more problematic than that. REX is going to push gas back. We think there’s probably between 500 [MMcf/d] and a Bcf a day of production that’s going to get pushed back into the Gulf. Then you’ve got your LNG boats — who knows how much they’re going to add, but they’re going to add something — so it looks like you’ve got well over 6 Bcf/d of gas-on-gas competition over the next year or two unless producers stop producing as much as they are right now.”

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