Peak Oil was projected to occur in 2005 and as of today, that projection is holding true. Two thirds of the global population lives at or below the poverty level. All of the energy use has been focused on the privileged one-third. What about those people in the other category? They want access to energy just like everyone else. Their immediate goal is to become part of the “Middle Class”. At the same time, the global population is growing on an exponential curve. “Houston, we have a problem!”
You can use the following traditional French riddle to illustrate the nature of exponential growth:
Suppose a water lily is growing on a pond in your backyard. The lily plant doubles in size each day. If the lily were allowed to grow unchecked, it would completely cover the pond in 30 days, choking out all other forms of life in the water. For a long time, the plant seems small, so you decide not to worry about cutting it back until it covers half the pond. How much time will you have to avert disaster, once the lily crosses your threshold for action?
The answer is, "One day." The water lily will cover half the pond on the 29th day; on the 30th day, it doubles again and covers the entire pond. If you wait to act until the pond is half covered, you have only 24 hours before it chokes the life out of your pond.
What “day” will the global leaders wake up to this problem as it relates to resources? People assume price to be the key factor in determining surplus of inventory. A low price suggests a surplus of inventory whereas a high price would indicate a shortage. Prices affect our decisions to consume energy.
Natural gas is heading for supply crisis. Cheap natural gas has caused many drillers to suspend drilling operations because they can’t afford to drill when prices stay below $6 per mcf. It’s simply uneconomic to drill a $6 million well and pay notable lease costs when you will be unable to recover the costs at $4 natural gas prices. Traders point to the current inventory levels as the indicator of cheap prices in the foreseeable future. However,
The following analysis provides a 12-24 month view of the natural gas situation in the U.S.
Areas of Supply Growth
|
Play |
Production change |
|
Fayetteville Shale |
+1.1 bcf/d |
|
Haynesville Shale |
+1.08 bcf/d |
|
Marcellus Shale |
+220 mmcf/d |
|
Woodford Shale |
+108 mmcf/d |
|
Cana Woodford |
+97 mmcf/d |
|
Eagleford Shale |
+134 mmcf/d |
|
Granite Wash |
+155 mmcf/d |
|
Pinedale Anticline |
+600 mmcf/d |
|
Total |
+3.494 bcf/d |
Areas of Supply Declines
|
Area |
Change in Production |
|
Piceance Basin |
-800 mmcf/d |
|
District Four of Tx. |
-1 bcf/d |
|
District Six of Tx. |
-1 bcf/d |
|
Barnett Shale |
-2 bcf/d |
|
Gulf of Mexico |
-3 bcf/d |
|
PRB CBM |
-200 mmcf/d |
|
Canadian Imports |
-4 bcf/d |
|
Total |
-12 bcf/d |
I believe we will see a net decline of US natural gas supplies of approximately 8.5 bcf/day.
Unless the economy collapses, expect upward pressure on natural gas prices and their related stocks. This situation is not about reserves under the ground but extraction of those reserves at an economic equilibrium. Shell gas needs a $6 breakeven and $7-8 price to really encourage drillers to ramp up their activity. In the meantime, leases are beginning to expire and will need to be renewed to hold those reserves in place, further increasing the cost of drilling those properties.
Those with natural gas production in place will enjoy a wider profit margin once the market prices in this disparity in supply and demand. This should make up for the underpriced natural gas being sold in 2009-2010.