HOUSTON - U.S. energy companies have slashed natural gas drilling activity in the face of plummeting prices, but that may not be enough to avoid a looming supply glut caused by anemic industrial demand and swelling imports.
As with everything, the U.S. natural gas supply and demand balance hangs on the timing of an economic recovery.
If the U.S. economy bounces back by the third or fourth quarter and industrial demand recovers, the natural gas market will likely strike a balance, said Robert Ineson, senior director of North American Natural Gas for Cambridge Energy Research Associates.
But, "If the economy continues to accelerate downhill, the demand issues really put a collar on things," Ineson told the CERAWeek conference this week.
Since peaking over $13 per million British thermal units (mmBtu), natural gas futures have tumbled more than 60 percent, hit hard by a recession that has eaten into industrial demand.
Making matters worse, underground U.S. stocks of natural gas are swelling.
This week's data from the U.S. Energy Information Administration showed domestic gas inventories at 2.020 trillion cubic feet, 2 percent above last year and 1 percent above the 5-year average.
RIG COUNT DROP
Scrambling to arrest a price slide and offset rising inventories, most energy companies have dramatically scaled back the number of rigs drilling for natural gas.
In January, the U.S. rig count fell nearly 13 percent from a month earlier to 1,553. That is down nearly half from the peak of over 4,500 in 1981, according to data from Baker Hughes.
The rig count drop should be enough to rebalance the market by 2010, the chief executive of Chesapeake Energy Corp (CHK.N), the most active driller in the U.S., said in an interview.
"There is a supply issue, but it's getting fixed," Chesapeake CEO Aubrey McClendon, said.
He estimates the U.S. rig count, which is down about 45 percent from last year's peak, will decline by as much as 60 percent.
And although the rig count is falling, oil and gas companies have yet to cut back drilling in hot shale plays like the Haynesville in Louisiana that hold vast amounts of natural gas. In those plays, initial production rates are huge and companies are still able to make a return on their investment, CERA's Ineson noted.
Imports of liquefied natural gas (LNG) were small in 2008 as higher prices in Asia drew cargoes away from the Atlantic Basin. But many expect a jump in the next two years, especially if oil and gas prices stay under pressure.
"I think that more cargoes certainly will go to the U.S. than previously anticipated," Rune Bjornson, executive vice president, Natural Gas for Norway's StatoilHydro (STL.OL)
The Asian LNG market is much more closely correlated to oil prices, so a reduction in Asian demand and a fall in oil prices improves the attractiveness of the U.S. market, the StatoilHydro executive said at CERA.
And the U.S. has a big enough gas market, enough storage capacity and the trading institutions to handle an uptick in imports, Ineson said.
For 2008, EIA put U.S. LNG imports at 350 billion cubic feet, down 55 percent from a record 770 bcf in 2007. The agency expects imports of 410 bcf in 2009.
"There are huge liquefaction operations that are coming on this year," Greg Ebel, chief executive officer of Spectra Energy Corp (SE.N), said in an interview last week. "They are going to have to put that gas somewhere and it may have consequences for prices."
As with everything, the U.S. natural gas supply and demand balance hangs on the timing of an economic recovery.
If the U.S. economy bounces back by the third or fourth quarter and industrial demand recovers, the natural gas market will likely strike a balance, said Robert Ineson, senior director of North American Natural Gas for Cambridge Energy Research Associates.
But, "If the economy continues to accelerate downhill, the demand issues really put a collar on things," Ineson told the CERAWeek conference this week.
Since peaking over $13 per million British thermal units (mmBtu), natural gas futures have tumbled more than 60 percent, hit hard by a recession that has eaten into industrial demand.
Making matters worse, underground U.S. stocks of natural gas are swelling.
This week's data from the U.S. Energy Information Administration showed domestic gas inventories at 2.020 trillion cubic feet, 2 percent above last year and 1 percent above the 5-year average.
RIG COUNT DROP
Scrambling to arrest a price slide and offset rising inventories, most energy companies have dramatically scaled back the number of rigs drilling for natural gas.
In January, the U.S. rig count fell nearly 13 percent from a month earlier to 1,553. That is down nearly half from the peak of over 4,500 in 1981, according to data from Baker Hughes.
The rig count drop should be enough to rebalance the market by 2010, the chief executive of Chesapeake Energy Corp (CHK.N), the most active driller in the U.S., said in an interview.
"There is a supply issue, but it's getting fixed," Chesapeake CEO Aubrey McClendon, said.
He estimates the U.S. rig count, which is down about 45 percent from last year's peak, will decline by as much as 60 percent.
And although the rig count is falling, oil and gas companies have yet to cut back drilling in hot shale plays like the Haynesville in Louisiana that hold vast amounts of natural gas. In those plays, initial production rates are huge and companies are still able to make a return on their investment, CERA's Ineson noted.
Imports of liquefied natural gas (LNG) were small in 2008 as higher prices in Asia drew cargoes away from the Atlantic Basin. But many expect a jump in the next two years, especially if oil and gas prices stay under pressure.
"I think that more cargoes certainly will go to the U.S. than previously anticipated," Rune Bjornson, executive vice president, Natural Gas for Norway's StatoilHydro (STL.OL)
The Asian LNG market is much more closely correlated to oil prices, so a reduction in Asian demand and a fall in oil prices improves the attractiveness of the U.S. market, the StatoilHydro executive said at CERA.
And the U.S. has a big enough gas market, enough storage capacity and the trading institutions to handle an uptick in imports, Ineson said.
For 2008, EIA put U.S. LNG imports at 350 billion cubic feet, down 55 percent from a record 770 bcf in 2007. The agency expects imports of 410 bcf in 2009.
"There are huge liquefaction operations that are coming on this year," Greg Ebel, chief executive officer of Spectra Energy Corp (SE.N), said in an interview last week. "They are going to have to put that gas somewhere and it may have consequences for prices."
