Natural gas surge fuels worries about glut

Consider Freeport LNG, which in June opened its $850 million terminal south of Houston. Freeport is the result of an eight-year plan to build a terminal to import liquefied natural gas .... On Aug. 1, however, Freeport LNG asked the Energy Department for permission to export LNG that it previously imported. The company said in its application that with increased shale gas production and lower prices in the United States, it was unlikely to import significant quantities in the near future, according to Platts LNG Daily, an industry news service./

By Jim Fuquay
Fort Worth Star-Telegram

If the United States continues to produce as much natural gas as it has in the year’s first five months, the country will see a 35-year high in annual production in 2008.

Is that too much of a good thing, at least from a producer’s point of view?



Thanks in large part to the drilling boom in the Barnett Shale and other new natural gas fields, U.S. natural gas production is up nearly 9 percent through May. At that rate, output this year will rise to nearly 22 trillion cubic feet, the highest since 1973’s 22.6 trillion cubic feet, the all-time record.

Meanwhile, there are more active U.S. drilling rigs than at any time since 1985, according to the Baker Hughes rig count. There were 1,967 rigs working across the country and offshore, up 88 rigs, or 5 percent, from a year earlier, the Houston-based oilfield supplier said.

And four out of five of those are looking for natural gas.

Last week, the Energy Information Administration released its latest short-term outlook for natural gas, which predicted an 8 percent gain in production for 2008. And in 2009, EIA said, "production is expected to increase by 3.7 percent," enough to roughly match the 1973 peak.

Good for consumers

From a consumer’s perspective, it could continue a recent break from the sharply higher natural gas prices seen in the first half of the year. After peaking at more than $13.50 per 1,000 cubic feet in early July, natural gas futures plunged, closing Friday at $8.10.

That coincided with crude oil’s fall from record highs during the same period. While the spike in crude oil has led Americans to cut their gasoline consumption, natural gas demand is expected to grow.

The EIA predicted a 3 percent increase in use nationally this year and 1.7 percent next year. Still, that’s less than half the supply growth, and that’s a shift from recent history.

"We hadn’t shown a growth mode for years. It’s been like a treadmill," George Hopley, natural gas analyst with Barclays Capital, said of U.S. natural gas production. There were changes in the market, he said, but "as fast as we lost industrial demand, we gained power demand" to generate electricity with natural gas.

"It worked out pretty well. Now we’re in a growth mode, and the question is: How do we balance this growth mode that seems to have some legs?"

So far, various industry players have recommended broad policy changes to increase demand. For example, Texas investor T. Boone Pickens has urged Congress to support a wholesale conversion of the country’s transportation fleet from gasoline and diesel to compressed natural gas. Others tout natural gas — a major component in electricity generation — as a replacement for electricity plants now fueled by coal, which is under fire for its heavy emissions of carbon dioxide, a greenhouse gas implicated in global warming.

Those, however, are years-long initiatives. Higher natural gas supply is here today and will be larger tomorrow.

Bad for producers

The combination has some financial analysts raising the issue with producers. For example, Chesapeake Energy Chairman Aubrey McClendon, after extolling the virtues of the company’s emerging prospects in Louisiana’s Haynesville Shale, brought up the subject during the company’s latest earnings conference call even before he was asked.

"Now before you become concerned about longer-term natural gas prices as a result of the sheer size of the Haynesville, please remember some likely natural constraints to the play’s growth," McClendon cautioned.

It’s likely to take several years to build the pipeline capacity to move gas out of the field, which itself should take decades to fully develop.

Constraints on new production and declines in older fields, "plus increasing demand from the U.S. power sector should be sufficient, in our view, to prevent a U.S. gas glut from developing."

EOG Chairman Mark Papa takes a similar view.

"We see the overall total Barnett field gas production peaking in 2009" at about 5 billion cubic feet per day, he told financial analysts on EOG’s second-quarter conference call. "Therefore, new resource plays will have to be the growth driver after 2009," he said, and he doesn’t foresee new EOG sources, such as its play in Canada’s Horn River Basin, filling that gap until 2011 or later.

"When you view supply growth in this context, the possible emergence of new domestic resource play is more digestible," Papa said.

Devon Energy, the largest producer of natural gas in the Barnett Shale, acknowledges the growing supply, but two weeks ago announced it was increasing its exploration and development budget.

"We maintain a business strategy and production plan based on a long-term view. We don’t let short-term variations in the market dictate our plans," said Chip Minty, a spokesman for the Oklahoma City-based producer.

The short term can present its own problems, however. Consider Freeport LNG, which in June opened its $850 million terminal south of Houston. Freeport is the result of an eight-year plan to build a terminal to import liquefied natural gas — natural gas that has been chilled to about 260 degrees below zero — from overseas producers.

On Aug. 1, however, Freeport LNG asked the Energy Department for permission to export LNG that it previously imported. The company said in its application that with increased shale gas production and lower prices in the United States, it was unlikely to import significant quantities in the near future, according to Platts LNG Daily, an industry news service.

LNG backers have invested an estimated $7 billion in LNG terminals around the Gulf of Mexico and the East Coast. LNG imports have fallen by over half from a year ago, and more U.S. terminals are scheduled to open this year.

Demand and prices for LNG overseas remains high, however, leading some U.S. producers to mention the possibility of exporting LNG.

Chesapeake’s McClendon briefly discussed the LNG market for U.S. gas during his Aug. 5 earnings call with analysts. Noting that natural gas was selling in Europe for roughly double its U.S. price, he said that "we’re trying to get it on a boat and get it to some overseas markets."

JIM FUQUAY, 817-390-7552

Patrick signs law that would ban LNG terminal for Fall River

By DAVID KIBBE, New Bedford Standard-Times

BOSTON - Gov. Deval Patrick has signed legislation that in effect bans an LNG terminal from being located in Fall River.

The law, filed by Rep. David B. Sullivan, D-Fall River, does not allow liquefied natural gas storage tanks to be within 5,000 feet of homes, elderly housing, schools, hospitals, health care facilities or businesses. It also bars LNG tankers from coming within 1,500 feet of those same areas.

The law applies to LNG terminals built after Jan. 1, 2007.

Weaver's Cove Energy has insisted in the past that such state laws would not supersede federal reviews of its proposed terminal. But the city could use it as another weapon in its legal fight to block the terminal.

The Coast Guard rejected Weaver's Cove's original proposal to bring LNG to Fall River by tanker, citing safety and navigational concerns.

Weaver's Cove is focusing on an alternate plan involving an offshore berth for LNG tankers in Mount Hope Bay. The tankers would unload via an underwater pipeline that would take it 4 miles to a terminal in Fall River.

The offshore proposal was immediately opposed by the city's lawmakers and congressmen.

"Liquefied natural gas continues to be an important part of the commonwealth's statewide energy plan, but there are also serious potential health and safety risks posed by LNG terminals and tankers," said Rebecca Deusser, a spokeswoman for the governor. "Governor Patrick questions the wisdom of siting new LNG terminals in close proximity to densely populated areas, and he is particularly concerned about the project proposed in Fall River."

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