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Saturday, January 31, 2009

Natural Gas Crisis Looming

Rockman has come up with a startling view of the near term future for natural gas in the US. He said he was ok with me starting a thread on this very important matter. Here are some of his quotes from the neighboring thread on drilling:

"...NG is where we'll see the big decline due to rigs being dropped. We're one of the big unconventional NG drillers and are dropping 40% of our rigs in the next few months as the contracts expire. The drop off in drilling combined with the steep decline rates of all those unconventional NG wells (which were the primary source of NG production increases in recent years) will result in significant supply drops in the next 12 to 24 months. Even if demand continues to fall as the economic contraction worsens we may see increasing NG prices down the road. And that's one more burden we won't need on top of every thing else."

"...I suspect the rig drop in the next few months will shock some folks. The down turn came very quick and companies responded as quickly. But the UNG wells take 2 to 3 months to drill. Add contractual commitments and it can take a company 5 or 6 months to completely shut down if they choose to do so. We and other companies are paying penalty fees in order to drop rigs faster.

And we see it daily on the personnel side. Rig workers at the bottom level are being dumped daily as well as salaries being cut for the keepers. As I type I’m working on a deep well in S La. There are a few young guys here with shiny new pick up trucks and worried faces. There are different job levels and many are being demoted to the next lower level. Essentially improving ability levels at a lower cost.

What I can't guess is how quickly production will fall. I might be too optimistic (for the consumer) by guessing it won't impact significantly for 18 to 24 months. If we have a colder then average winter (always the NG seller’s wet dream) there’s an outside chance we could see short term shortages as well as higher prices by next winter."

...
"Until I saw our latest drilling schedule I figured we wouldn't see a big drop for 18+ months or so. And then only if the slow down stretched out. But when I saw us cutting back from 18 rigs to 3 rigs I wondered if it might hit you folks by next winter (it will hit us air conditioned folks hard in Texas too...a big chunk of our electricity comes from NG). Even a better chance of rougher times ahead if the others operators are cutting back to a similar degree. I don't have a data base that I can model the decline potential but perhaps someone hanging around TOD does. Qualitatively, I am concerned we could see much higher NG prices in the next winter cycle even if demand destruction continues. Higher unemployment and higher NG/electricity prices: truly painful times."

"The current NG rate is composed of a number of different types of reservoir drive types (with different decline profiles) of different ages (thus at different points in their decline lives). There are old conventional NG fields which individually produce small volumes but collectively add up to a good bit. The decline rates in these fields is generally low. Then there are other conventional reservoirs which are relatively new. Last summer the Deep Water Independence Hub pipeline system became active in the GOM. It came on close to 1 billion cubic ft per of NG. Fortunate timing because it made up almost exactly for the production soon to be lost from the hurricanes. Much of that lost production is still offline and coming back on slowly. But no way to project those gains. Those Deep Water NG fields have high initial rates but fairly quick declines (4 to 6 years) but not as rapid as the unconventional NG plays. And then there are the UNG wells themselves with high initial rates and then quick decline followed by a low decline but a potential long life at those low rates.

To come up with a projected US NG rate for the next couple of years one needs the numbers and age of wells in each category above and their current flow rates to generate even a rough production model. That is the lacking data base I refer to above. A rig count projection only gives a part of the model: how many wells won’t be drilled in the future. An important part of the model but only a portion. That data base isn’t so much lacking but beyond my time and logistic capabilities. The USGS could throw 4 or 5 folks at the task and come up with a fairly good projection in a month. The data is out there and all publicly available. Whether they know to do it, want to do it, have already done it and don’t want to tell the public….who knows. I can only offer a qualitative guess. The rapid rise of US NG rates were due largely to the UNG and the Deep Water GOM. Both have relatively high decline rates. Thus my final conclusion: we’ll see NG rates go down almost as quickly, just as quickly or even more quickly then they rose.

Whatever the case, it won’t be good for the economy. Whether it drives NG rates below demand even as that demand declines with a worsening economy remains to be seen. Remember: all NG reservoirs are always declining at some velocity. The UNG reservoirs at a very high velocity. It’s their relative percentage of the mix that will determine the potential impact. It was only the ever expanding UNG drilling that hid that overall decline from view."


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