Friday, February 13, 2009

More on Chesapeake's Expectation for Gas Prices to Increase

At the Cambridge Energy Research Associates CERA Week Conference in Houston earlier this week, Aubrey McClendon of Chesapeake Energy made a presentation that suggested market forces will cause natural gas prices to recover in 2010 and 2011. Quoting his presentation:
  • "Against unrelenting pessimism about U.S. natural gas prices in early 2009, there is emerging evidence that market forces are creating the conditions for a strong natural gas price recovery in 2010 and 2011
  • "What is that evidence? It’s plunging rig counts (40-50/week lately) and accelerating decline curves (the “dark side” of technology)
  • "What do we know today?
    – First year U.S. decline rate is 25-30%, i.e. 15-18 bcf/day
    – 2008 U.S. gas production YOY increase of 7-8%, or 4-5 bcf/day
    – 2008 natural gas rig count averaged 1,500 rigs – this overcame first year depletion of 25%-30% and generated growth of 7-8%, for a combined 32-38% growth rate
    – If natural gas rig count went to zero, then all would agree this 32-38% number would also become zero
    – So, if natural gas rig count goes down by 50% in 2009, CHK believes industry will lose ~40% of this 32-38% production capacity increase, through which 7-8% growth disappears and 7-8% production declines appear by YE 2009. So, YOY growth of 4-5 bcf/day in 2008 will give way to a decrease of 4-5 bcf/day a year later, setting up a big price rebound in 2010 and 2011 if U.S. economy does not materially weaken from here"

The company also believes, as many do, that the Obama administration will be good to natural gas, especially on the demand side. Democrats in general favor natural gas because it is a domestic product and burns cleaner than oil and coal. Many believe that the Obama administration will more quickly advance the conversion of coal plants to natural gas and the implementation of natural gas vehicles, both of which will lead to significantly increased demand.

Chesapeake also discussed the "Big Four" gas shale plays in the U.S. and stated the company's overall expectation for each: Barnett (~75 Tcf), Fayetteville (~75 Tcf), Haynesville (~500 Tcf) and Marcellus (~500 Tcf). Chesapeake believes that they Haynesville and Marcellus Plays will become two of the top ten or top five worldwide gas plays. Obviously Chesapeake is biased because of the company's position in each play, but that's still a strong statement. It's funny that people talk so much about the Barnett Shale, possibly because it is a more mature play, but based on Chesapeake's expectations, the Haynesville Play will be more than six times as big as Barnett.

An article at discussing the presentation also noted that that McClendon said, "We think in time it will become the largest gas field in the world at 1.5 quadrillion cubic feet." Chesapeake believes that the Haynesville Play will be the largest U.S. gas field by 2020.

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