A lack of cheap, easy drilling prospects, a succession of price shocks and industry consolidation are some of the main factors behind the downturn of natural gas production in North America, according to financial analyst Irene Haas.
In addition, “the survivors are a lot more cautious.” Having been caught in price shocks, the latest being last spring, “which was pretty horrible…They’re all sort of bottom line-oriented,” the Sanders Morris Harris analyst said. “If you could believe that $3 to $4 is what you reasonably could expect going forward, then you could plan your capital spending program accordingly.”
Haas cited a series of upheavals in the capital cycles over the last five years, starting with the 1997 Asian currency crisis, that have led to price collapses. “These have prompted companies to stop spending. The geology is getting very mature in the lower 48 and even in the more conventional areas in Alberta. You either have to have level pricing to encourage producers to go into more difficult environments or a breakthrough in technology. And there’s been no recent technology boost.”
“The irony is that a lot of the new gas being found is unconventional gas, coalbed methane, in the Rockies, and transportation out of the Rockies into the Midwest or West Coast is not what it ought to be — it’s not sufficient to carry the gas — and the prices reflect that.”
Once higher prices are established, the worries shift to increasing cost components as more producers move back into more normal levels of drilling, and downstream demand destruction among industrials. “On the industrial side even $3-$4 can cause lot of pain for the industrial end user,” Haas said. It’s another reason for producers to follow a cautious game plan.
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