Monday, November 1, 2010

Chin Up, Gas Fans

These days, it's easy to be down about natural gas.  The commodity price is very low, unsustainably low.  Gas rig counts haven't budged as prices keep dropping.  Demand just hasn't picked up as expected as the economy creeps along towards recovery.  A comprehensive energy policy that would have made gas more attractive got caught in a political thresher and doesn't appear to have much of a future as leadership potentially changes hands in Washington.  Weather experts are predicting a warm winter.  The list goes on.

All of these things point to a bleak short-term outlook for natural gas.  But the long-term outlook is improving as we start to see hopeful signs.  The good news is that change is coming.  The bad news is that it doesn't seem to be in a hurry to get here.

Some of these positive signs are coming from big producers like Exxon and Shell, both of which are actively shifting corporate strategy toward a greater emphasis on natural gas.  Last year, Exxon picked up XTO Energy in a controversial acquisition, and earlier this year it bought Ellora Energy.  Exxon is betting on a shift in the regulatory framework to put a price on carbon.   It's important to look at companies like Exxon. They don't make short-term investments, and they, unlike the independent E&Ps, can afford to take a long-term perspective.  These companies are also starting to pick up assets that will be valuable in the long run.  They didn't rush into shale exploration, but it might not be long before they dominate it.

Carbon regulation has been a big question mark, but even without specific regulation, utilities making investment decisions today have to weigh the potential for carbon regulation down the road when choosing between coal and gas.  As a result, I think gas is going to win more often than coal.  Certainty usually prevails over uncertainty in capital planning.  Again, these are decisions with long-term impacts that won't impact the supply/demand equation for a while.

Compressed natural gas (CNG) fueling infrastructure is starting to be built.  Fleets are leading the way, but public stations will start popping up around the country.  I don't think it will be long before ordinary people will be able to drive across the country on CNG comfortably.  It is important to realize that every new CNG station enables more and more natural gas consumers.  Once the basic CNG fueling infrastructure is in place, the number of vehicles (a.k.a gas consumers) can grow exponentially.

In the U.S. we sometimes get caught up in our own limited world view.  It's easy to do with natural gas since it traditionally has been a regionally traded fuel.  But with the advent of LNG tankers and regasification infrastructure, the trade is becoming more worldwide (although pricing is still very inconsistent).  While the U.S. seems to be having trouble understanding the benefits of gas - especially the environmental benefits - they are not lost on other countries.  Even Cuba is taking steps to import LNG (albeit from Venezuela) to replace the use of heavy fuel oil for power generation.  Cuba isn't looking at the Kyoto Protocol or recent talks in Copenhagen.  It sees direct benefits in terms of better air quality.

One of the big fears for the past couple of years has been an influx of LNG to the U.S.  The import infrastructure now exists, but the shipments aren't coming (at least not in the expected volumes).  LNG shipments can find happier homes in other parts of the world, so why come here?  The encouraging news is that several LNG ports are applying to become exporters. It will take time to realize, but I expect the U.S. to become a natural gas net exporter in the next ten years.

As we've discussed numerous times, North American shale gas has upset the dynamics of natural gas worldwide, and I think it is taking a few years for the market to re-chart its course.  The short-term prospects for gas in North America won't start improving until the drilling to hold leases in some of the "gold rush" shale plays tapers off in the next few years, but the good news is that the long-term prospects are improving.  Chin up, gas fans.  Keep your eye on the horizon - the wind eventually will be at your back.

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