The Oil Drum | US Natural Gas Prices: "The Fix is Underway"

50 comments on US Natural Gas Prices: "The Fix is Underway"

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mkkby on April 22, 2009 - 11:37am

Maybe. Never listen to company or CEO opinions unless you like losing money. All they ever do is cheer lead for their company. Why? Because they have stock options, that's why.

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ROCKMAN on April 22, 2009 - 1:02pm

Nice summery as usual Gail. As mentioned before I'm not very optimistic about NG prices rebounding strongly in the next 12 to 24 months. My very rough model mimics your comment regarding the ability of many UNG wells, which have already undergone high decline rates, to provide a buffer in aggregate. Add that to the fact that should the recent successes in the sweet spots in the Haynesville and other plays continue to be drilled the results will average significantly more then wells drilled in previous years. We were drilling fewer wells in 2H08 but they were much longer (2X - 4X) laterals with many more fracs per well (10 or 12 vs. 4 or 5). Thus the newer wells had the same production increase effect as 2 or more of earlier wells.

As far as the view from inside the industry demand destruction is an obvious concern with respect to predicting a rebound. But a much bigger concern is the inability to anticipate just how much imported LNG will become available to the domestic market in the next several years. Lots of facilities coming on line in the next 24 months with over 40 LNG tankers sitting idle at the moment. I’ve seen various (unsupported) estimates of LNG reaching the US at a cost of $2.50 to $3.50 per MCF. A lot might end up in the EU given the recent disruptions from Russia…or not. A big uncertainty. OTOH, the Feds just denied a permit for an offshore LNG receiving plant in Long Island Sound. I haven’t been able to dig up an estimate for current/near term receiving capabilities. Just another big uncertainty. An unusually early/cold winter might produce a price spike but the industry won’t snap at such short term bait. But those with shut-in volumes will open up their wells.

Just a WAG but I don’t think the industry will respond as quickly to rising demand (whenever that occurs)as some might think: potential LNG imports, low residual incomes, tight credit market, financially damaged drilling industry (if the rig count remains at current levels for the next 12 months expect to see a significant contraction of existing companies). From a personnel stand point we are on the verge of massive industry layoffs. You won’t see big numbers coming from the public companies: a very large portion of their staffs are composed of consultants/third party contractors. When they “send those folks to the house” it won’t be counted in the layoff numbers. Those that can switch industries will and won’t look back. Those that can’t will just scrape by. And those close enough to retirement might just hang it up for good. But not me...my 8 yo daughter has decided to become a horse vet so retirement is no longer an option. Besides, I'm having too much fun anyway.

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Gail the Actuary on April 22, 2009 - 1:44pm

Rockman,

Thanks for your comments!

By the way, this article is Jon Freise's, not mine. About all I did was copy his HTML onto our server.

My impression has been like yours--it seems like it is going to be hard to get the price to come up very much for very long, because of the very high production on some of the newly drilled NG wells, and because of LNG.

Regarding all of the new LNG terminals, is there any reason we need as many additional terminals as people are looking at? It seems like we have plenty already. None of them have ever been utilized at more than at a small percentage of capacity, have they?

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ROCKMAN on April 22, 2009 - 2:36pm

Gail -- I’ve just found a current assessment of US LNG import potential. Not a lot of supporting details but does seem to have a handle on the situation. His bottom line: LNG won’t be playing a big role for the US anytime soon. Now if the NG companies would just believe that.

http://www.petroleum-economist.com/default.asp?page=14&PubID=46&ISS=2535...

“And development of import capacity continues, although the pace of construction has slowed down. In 2008, three new terminals started operations, increasing US import capacity to about 9.1bn cf/d. In addition, three new terminals are expected to start up by 2010, which, combined with capacity expansions at existing terminals, will raise import capacity to well above 13bn cf/d.”

“Domestic gas-supply growth and sustained lower US gas prices will make it difficult for LNG to penetrate North American markets. Even during periods of volume influxes, US imports have never accounted for more than 3.5% of annual gas supply. Consequently, LNG will remain a marginal US gas-supply source in the short term, accounting for less than 5% of gas consumption.”

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Moneyman on April 22, 2009 - 10:55pm

I know a guy who works at the new LNG terminal in Freeport TX south of Houston. In the last year, they have taken only two ships due to low US prices compared to the world market. Off the top of my head, they have capacity for roughly one ship every two days...so ~1% of capacity. Fortunately for them, they have long term contracts in place that keep them financially viable... unless their counterparties fail.

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Neil1947 on April 22, 2009 - 7:27pm

Gail,
The US used 22Tcf NG in 2008(62Bcf/day), so a LNG import capacity of 13Bcf/day is >20%, sounds like this capacity is vastly under utilized if only 3.5% NG was LNG imports. What about NG coming from Mexico LNG terminals? Is this counted as LNG or just pipeline imports from Mexico?

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ROCKMAN on April 23, 2009 - 6:34am

Neil -- I couldn't find country specific import data for LNG but the report below indicates that there is probably no LNG imported from Mexico. I know for some time Mexico had been a net importer of pipeline NG from the US. They have also been importing the bulk of refined products for some time also...serious lack of refining capability. I think the report indicates the situation for NG remains the same:

"In 2007, the United States received 99.8 percent of its pipeline-imported natural gas from Canada with the remainder from Mexico. Canada also accounted for 60 percent of pipeline natural gas exports, and Mexico, 40 percent."

http://www.eia.doe.gov/pub/oil_gas/natural_gas/analysis_publications/ngp...

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elwoodelmore on April 27, 2009 - 5:05am

we have this from xom's annual rept:

"by 2030 lng demand is expected to represent about 15% of the world's gas demand"

and, "exxonmobil is currently participating in lng operations in qatar and indonesia with a combined gross capacity of approximately 35 million tons per year supplying lng to markets in asia, europe and north america. this represents about 20 percent of global industry capacity. exxonmobil is participating in four additional lng trains in qatar that will increase gross capacity by over 30 million tons per year in 2009"

1 million tons of lng(methane) is about 47.4 bcf. i think i have this right:

2000lbs/ton/16lbs/lb-mole = 125 lb-moles/ton 1 lb mole is about 379.5 scf, 125 x 379.5= 47,438 scf/ton and a million tons is 47,438 x 1e6/1e9 = 47.4 bcf/million tons.

also from xom's annual report:"rasgas trains 6 and 7 - two 7.8-million-tons-per-year lng trains........with start-up planned in 2009..... train 6 is planned to supply the u.s. market,...."

7.8 million tons per yr is a little over 1 bcfd.

and a related story:

http://www.reuters.com/article/marketsNews/idAFLR4094220090427?rpc=44

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JonFreise on April 22, 2009 - 2:30pm

Thank you for the comments. It is always great to get the inside view.

I just came across this graph from Tudor Pickering Holt which supports your first paragraph. The marginal wells are cut out first. The drop in well productivity from 2000 to 2001 as drilling ramped up, then the improvement from 2001 to 2002 as drilling fell back again is pretty neat to watch.

And the shale wells are gaining in productivity. You can see the first year production has stopped declining and is making a slow improvement.

I do have a question: Is this improvement in initial flow rates matched by an increase in ultimate recovery of the well? When a 4 stage frac job is replaced by a 10 stage, does that increase the total gas that is recovered, or does the well just pull out the gas faster?

While price interests me, I am more concerned about the shape of NG supply long term as we grapple with peak oil. And to understand that we need to know how much technology is improving our ability to capture more gas. (I wish I had a similar chart with estimated ultimates vs # wells drilled.)

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ROCKMAN on April 22, 2009 - 2:47pm

Jon -- the general model suggest that URR increases significantly as lateral length and number of frac stages increase. Think of the fracs as mini wells drilled off of the main trunk. The matrix permeability of these rocks is absurdly low. I've seen analysis of core samples which would make you doubt a well would flow 100 cf/d let alone 20 million cf/d. Thus ultimate recovery will depend strictly on the area drained. Long laterals with multifracs drain a greater area.

I haven't seen much data released from the companies on URR but estimating those values from such pressure depletion reservoirs is as reliable as it gets in the oil patch: plot the rate on a log-normal scale and you get a very straight (and thus predictable) ultimate recovery. It's a very rigid volume vs. pressure decline scenario.

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elwoodelmore on April 22, 2009 - 8:01pm

"The matrix permeability of these rocks is absurdly low."

wouldn't that suggest that the gas in place and permeability of the natural fractures is high, or at least a high percentage of "effective" permeability and gas in place ?

i am not that familiar with the shale gas plays, but for the bakken oil play of the williston basin, there appears to be two species. the elm coulee type where matrix porosity and permeability are low, but not absurdly low, and the parshall field type with fractures so intense that some of the rock has been described as crumbly. the performance of the two is of two species.

and wrt the correlation between ip and reserves, imo, there is a correlation, but not anywhere near a direct(1:1)correlation
as some public traded companies have claimed in analyst's presentations. in a competitive reservoir, the stronger well will probably capture more of the reserves than a weaker well. and if all the wells are on steroids, they may just recover the reserves faster.

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ROCKMAN on April 23, 2009 - 6:56am

elwood -- yep...fractures make the play for sure. Technically speaking a perfect fracture has nearly infinite permeability. What is really amazing about the shale gas plays is that the induced fractures are connecting natural fractures to the well bore in addition to draining the matrix. The one core analysis I've seen on the Haynesville Shale indicated no effective permeability of the matrix. But this well had an IP of over 7 million cf/day. That's the "absurd" aspect I was referring to. Unless matrix perm improved significantly close to the well bore then all the production was coming from the connected fracture system. But that's the rub: the fractures have great perm but volumetrically they'll contain a relatively small amount of NG. A developing theory is that the NG is being produced in a similar fashion as coal bed gas: it's actually a molecular portion of the shale and lowering reservoir pressure causes an instability which breaks those molecular bonds. That's one reason you'll see "in-place" reserve numbers stated as "mcf per cubic foot of reservoir rock" compared to "mcf per acre-foot of porosity" of a conventional reservoir. Expulsing NG from a shale gas sample of rock via conventional methods yields nothing. The sample has to be ground to a fine powder to release the NG. WRT to IP vs. URR I wasn't referring to a correlation between IP but the actual decline curve to URR. It takes about 6+ months to get a good statistic to project a good URR. Well A might have an IP twice as high as Well B due to a better fracture system. But after 6+ months of production the log-normal decline curve might actually show a higher URR for Well B. This characteristic is common to all pressure depletion NG reservoirs be they gas shales or conventional sandstone traps.

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elwoodelmore on April 24, 2009 - 5:21pm

interesting, rockman. no, i didnt take it that you were using ip as a proxy for urg, only that some public traded companies seem to want the investors/analysts to think so.

spe 24320(stright,etal 1992) discusses some early testing and simulation efforts wrt fractured shales/siltstone/dolomites in the williston basin. and among the conclusions, for a specific area, are that 90% of the porosity is contained in the matrix while the fracture system accounts for 99% of the total system permeability. stright also concludes that the fractures are spaced on the order of 2 cm.

edit:

"fractures make the play for sure."

yes, i am aware of that, and maybe my comment was not crystal clear. it appears that some of these fractured reservoirs consist of the fractures and not much else. i.e. the fractures make up a significant % of the gip. the production profile could be characterized by a high rate with a steep decline for the life of the well. like a gypsy moth.

http://en.wikipedia.org/wiki/The_Gypsy_Moths

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memmel on April 25, 2009 - 6:02pm

A couple of points as far as molecular desorption is concerned in this case caused by a pressure swing.

First off its very much a surface phenomena with the region that can readily absorb/desorb located in a thin layer close to the surface. Feeding this from the bulk material is a painfully slow process.

Think about filling a paper bag with paper towels then full of water. I can't imagine this would be a fast process its well understood and pressure swing desorption normally requires high surface area and a significant pressure drop.

More interesting is the probably if the shale is wet that it might be some sort of hydrate forming in the clay. This could may the desorption region larger since its also including a liquid film.

Regardless at some point the desorbed sites also begin to develop significant absorbtion capability of their on slowing the overall migration rate.

Just one link I found.

http://www.osti.gov/bridge/servlets/purl/825287-VkZW2D/native/825287.pdf

Probably whats happening is your connecting to fractures that extend through most of the formation.

These wells are effectively draining most of the formation.

If I'm right what people will find is that after a few are drilled the entire play becomes poor.

A worst case example is you drill one it connects almost all of the formation and the next well gets some gas from local fractures and thats it. Effectively only one single viable well in a formation that may extend for miles. After that you could easily find that further wells simply don't even recover costs.

Depending on the formation I really suspect this is what people will see with only a handful of wells being super producers and several poor producers in a row before giving up.

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elwoodelmore on April 26, 2009 - 7:48am

"A worst case example is you drill one it connects almost all of the formation and the next well gets some gas from local fractures and thats it."

based on my experience, a (naturally) fractured reservoir is above all else heterogeneous. a pressure response may be detected in a well miles away almost instantly, while another well nearby may not appear to be connected at all. i dont think we should expect a fractured reservoir to be fractured uniformly. look at a shattered windshield for an example.

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elwoodelmore on April 26, 2009 - 9:47am

wrt desorption rockman posted:

"A developing theory is that the NG is being produced in a similar fashion as coal bed gas: "

i am wondering at what pressure desorption will take place. for a coal bed methane well, this pressure is on the order of a few atmospheres to a few 10's of atmoshperes.

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davidel on April 25, 2009 - 10:17am

The indisutrial demand destruction which occurred during the past 20-30 years was partly due to Globalization. If those who foresee globalization unwinding due to an array of factors such as the increasing future cost of transportation, restrictions on imports from environmentally unfriendly countries, increase in protectionism etc. are right, then there will be a gradual buildup in industrial capacity within the US.

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memmel on April 25, 2009 - 1:39pm

Rockman I have a question for you one aspect of NG wells I've been trying to get a handle on is the need for compressors as the well pressure drops below line pressure. These are of course expensive and right now I'm wondering if a lot of older shale wells might well be capped until it makes sense to add compressors.

I could of course be all wrong on this but I've been wondering about the dynamics of this for a bit.

Compressor station issues could be important.

Maybe :)

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