Natural Gas Predictions for the Coming Year

Pricing and Production Holds Steady

Since our contribution to The Element last year, North American natural gas markets have remained flush with supply volumes. This is a result of the unlocking of vast shale gas reserves made possible through technological advances.

This has been good news for consumers of natural gas, as prices have fallen steadily from their peak in 2008; and for producers, as it has heralded new production opportunities.

Production Volumes: Then and Now

Production volumes in the U.S. continue to increase at phenomenal rates each year despite historically low prices. According to the U.S. Energy Information Administration, natural gas production totalled 59.1 Bcf/day in 2010 versus a total of 55.2 Bcf/Day in 2008. The 7.1 per cent increase over a two-year period was unprecedented in terms of historical natural gas reservoir performance. The trend continues in 2011 with June production up an outstanding 8.9 per cent over the same month in 2010.

Part of the increase in production was a result of producers delivering volumes to seemingly uneconomic markets. There were a number of incentives for them to do this, including meeting drilling commitments to prevent expiry of costly land leases, and taking advantage of favourable pricing related to the locking in of higher prices available in the futures market a few years ago.

Both of these incentives are less prevalent today as drilling commitments are being met and prices within the futures market are currently significantly lower than in previous years.

Today, producers are pursuing a new lucrative opportunity to increase production volumes that, ironically, is partially due to the low natural gas price environment. With U.S. natural gas prices averaging U$3.50 to U$4/MMBtu, and crude oil prices in the U.S. averaging U$85 to U$95/barrel, producers are focusing on drilling into liquids-rich reservoirs, such as the Eagle Ford and Marcellus plays in the U.S.

Technological advances have led to a rise in production volumes. This is good news for consumers and the producers, alike.

The By-Product Boom

Along with natural gas volumes produced from these shale gas reservoirs, natural gas liquids are also extracted that can be fractionated into ethane, propane, butane and condensate streams.

These liquid components are priced at a differential to the higher energy-equivalent crude price, which represents a significant premium to the natural gas price that the liquid components would attract if they were to remain in the natural gas stream. As a result, producers are aggressively pursuing liquids’ rich natural gas plays (shale or conventional) with natural gas as a by-product of that drilling activity.

Prediction for the Coming Years

This article has focused on the U.S. market because it is the driver behind North American natural gas fundamentals and pricing, and ultimately pricing in Canada.

We really do not anticipate North American natural gas market fundamentals to change significantly over the next few years, in the U.S. or in Canada. With a slow recovery in North American industrial natural gas demand expected to continue, combined with an increasing supply base, natural gas prices should continue to remain soft when compared to pricing prior to 2009.

Saskatchewan Minerals continues to be actively involved in managing its natural gas price risk and working with France Financial Consulting to adjust its price management strategies as natural gas markets evolve.

Good volume and fair prices look to hold steady in the coming year.

France Financial Consulting

France Financial Consulting is a firm owned by Gil Labonte, Eugene Setka and Dave Scratch. We have since 1986 provided a variety of energy management services to more than 60 industrial, commercial and institutional energy consumers in Western Canada. Our primary focus is on all aspects of our client’s natural gas and electricity requirements.

The principles have extensive experience in negotiating short and long-term energy contracts. We also provide our clients with customized price management strategies, alternatives and recommendations that will assist in meeting budget objectives.