The downward price pressure on U.S. natural gas “should be sustained for many years,” said the global energy research chief for Credit Suisse.
Ed Westlake and some Credit Suisse commodity analysts discussed oil and gas prices, as well as the unconventional production from shale, during a recent conference call. Westlake’s takeaway: gas prices should remain relatively low, while the price of U.S. oil should continue to find a comfortably “high” floor ($90/bbl Brent, $80/bbl West Texas Intermediate) for at least the next couple of years. Beyond 2015, however, the oil price risks are further to the downside.
For U.S. natural gas to gain some traction, “we’re going to need a hell of a lot more demand,” said Westlake. “An abundance of natural gas and the high cost to liquefy suggests low U.S. gas prices are here for a while.” However, King Coal’s overthrow by gas “looks increasingly inevitable from 2020 onwards.”
North America’s ability to achieve gas independence is without question. Achieving complete oil independence is another matter. If Brent oil prices were to stay high, it’s possible for North America “as a whole to become more oil independent,” said Westlake. “This would require success in matching our forecast improvements in well recoveries, efficiency, high oil prices, safe operations and supportive policies at the federal and state levels.
“But global decline is still an issue. Indeed, shale helps at the margin but it does not flood markets…” Credit Suisse is “less convinced” that abundant U.S. shale oil “will derail oil markets this decade.” Oil is not as low cost to develop as natural gas, even in the most efficient exploration and production (E&P) plays. “Shale oil sweet spots work in the $75.00/bbl Brent range, but marginal acreage could require $90.00/bbl-plus,” said Westlake.
U.S. E&P research analyst Arun Jayaram said operators have shifted to the “efficiency era.” The United States shifted to the unconventional era about a decade ago. At that time, “acreage capture and production growth” were key. Today, “it’s not about volumes, but value,” said Jayaram.
One way to outperform even with low prices is on a “positive rate of change,” he said. “Good rocks can outperform gas prices.”
Where wells are “getting better, where costs are lower,” producers can make money. There may not be any “new” onshore fields left to discover. “That strategy appears to be long in the tooth…We have been pretty skeptical about new venture strategies, and skeptical on finding another Eagle Ford, for instance. It’s better to focus on the rate of change story…”
Producers now are focusing on their “franchise assets.” For EOG Resources Inc., the franchise is Eagle Ford Shale. Range Resources Inc.’s is the Marcellus. For Devon Energy Corp., it’s first franchise, the first franchise for any company, was the Barnett Shale.
Everybody concentrates on the prices, but “little has been written about the potential impact to E&P valuations” from the potential uplift of unconventional assets in hand still to develop. “It’s a much bigger pie,” he said.
Some of the value “will accrete to the majors, government through royalties and the privates, but the bulk of the value should be captured by public E&Ps…The E&P pie is poised to get significantly larger…And this assumes no value creation from natural gas, which we view as conservative.”
The “key to investing” is to review a play’s “rate of change.” As an example, consider the Marcellus Shale. Its rate of change “trumps a low gas price…because it’s at the low end of the cost curve,” said Jayaram. “Since operators started horizontal drilling in ’08 and ’09, the well results have continually gotten better. And we still think it’s in the early innings. Producers have shifted to development mode from acreage-capture mode. Now they are focused on increasing lateral lengths, completions. There’s still upside on the rate of change in the Marcellus…”
Using four years of production data, Credit Suisse determined that gross estimated ultimate recoveries (EUR) from northeastern Pennsylvania “are significantly higher than even the most bullish estimates…We estimate the average well is 9.0 Bcf or higher gross in four key northeastern counties. This compares to the average U.S. gas well of 1.3 Bcf. Our model assumes EURs of only 5.7 Bcf/d on a blended basis.”
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