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1-7 days 8-14 days The weather is always the X-factor in assessing future pricing. Mild winter and/or cool summers are bearish while extended cold arctic blasts and blazing summers are bullish. Demand: While the economy and manufacturing levels play a big part in the supply/demand equation, the weather (winter and summer) holds the reins and controls the pricing throttle.
Drilling down . . .
Production: Even with all of the well shut-ins from earlier this year, we expect robust supply to remain throughout the year with horizontal rigs being the shale rig of choice, as their production is much higher than when first introduced a few years ago. Drill time is shorter, laterals are longer, and fracking techniques have been greatly improved. As mentioned earlier, many dry wells were shuttered in favor of "wet" or "liquid" plays, but still much natural gas is produced in these "wet" wells. Additionally, there are a "large" number of these wells that have been drilled and are just awaiting the piping infrastructure to be finished in order to bring their gas to market. As coal plants retire they are not being replaced. Whether it be for economics or costs to retrofit to meet EPA standards, operating margins are not what they used to be and no longer cover their fixed costs. Instead, gas fired plants are picking up the slack. Bottom Line: Greater natural gas production will likely be required moving forward and is available. Note: In the Marcellus, production is expected to "surge" adding 3.8 Bcf/day in the next twelve months which should easily recapture any shortfalls elsewhere in the production system. If there was to be a weak link in the supply/demand equation, we don't expect it to be here . . . this year. In short we expect natural gas supply to increase year-over-year. Storage: Current storage levels are high, and given the Thanksgiving week and warmer weather there is an outside chance for even a small injection on the next storage report. If not, we expect the next EIA storage report to show a very small withdrawal.
We believe that end-of-winter storage levels may well be reduced to around the 2,000 Bcf level this spring, with increased storage capacity of 4150 Bcf for the 2013 injection season. If this proves out, we expect the sawtooth design above will continue to rise.
We expect the "end of winter" storage levels to be near 2,000 Bcf. For the last 20 years, up until last year, we wondered what might happen if end of winter storage was at the 2,000 Bcf level. Last year storage bottomed out at 2369 and we saw what happened to spring/summer pricing.
Pricing Projections: The EIA has indicated that they envision a median price of $3.35 throughout 2013, whiles another one of our superb analysts has set his 2013 median pricing at the $3.55 level. So some monthly prices may be below $3.00 while others might be upper $3 or lower $4 level. Political Ramifications: A complete review and overall perception of our energy market would be
remiss if we didn't talk briefly about political agendas and recent election results. It should be remembered that the current administration has a penchant for promoting "green" energy solutions while shaking a finger at the "coal" industry. Whether it's through presidential decree or through EPA doctrines, it does appear as though there is a rocky road ahead for coal. With that in mind, the next best play as a substitute for coal-fired generation is natural gas. Fracking and water issues are also still suspect with this administration.
We believe the Keystone Pipeline will be built, but when remains to be seen. California, being the "clean-air" leader it is, now has carbon credits tied to electricity purposes, as another means of raising taxes and supporting bullet trains. More on this moving forward.
Contrarian Assessment
And lastly, to provide a contrarian opinion to the industry accepted "rosy" viewpoint of 100+ year shale gas production and energy independence, we have included articles about the "The Shale Gas Bubble About to Burst" by Steve Horn.
Shale Gas Bubble About to Burst: Art Berman, Bill Powers Bill Powers, editor of Powers Energy Investor, has a new book set for publication in May 2013 titled, "Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth." Powers' book will reveal that production rates in all of the shale basins are far lower than the oil and gas industry is claiming and are actually in alarmingly steep decline. In short, the "shale gas bubble" is about to burst. In a recent interview, Powers said the "bubble" will end up looking a lot like the housing bubble that burst in 2008-2009, and that U.S. shale gas will last no longer than ten years. He told The Energy Report: "My thesis is that the importance of shale gas has been grossly overstated; the U.S. has nowhere close to a 100-year supply. This myth has been perpetuated by self-interested industry, media and politicians...In the book, I take a very hard look at the facts. And I conclude that the U.S. has between a five- to seven-year supply of shale gas, and not 100 years." The hotly-anticipated book may explain why shale gas industry giants like Chesapeake Energy have behaved more like real estate companies, making more money flipping over land leases than they do producing actual gas. Powers told The Energy Report: "Put simply: There is production decline in the Haynesville and Barnett shales. Output is declining in the Woodford Shale in Oklahoma. Some of the older shale plays, such as the Fayetteville Shale, are starting to roll over. As these shale plays reverse direction and the Marcellus Shale slows down its production growth, overall U.S. production will fall." Powers believes we are quickly approaching a gas crisis akin to what occurred in the 1970s and because of that, prices will soon skyrocket. Art Berman Also Sounds the "Shale Gas Bubble" Alarm Arthur Berman, another investment insider, echoed Powers in a recent interview with Oil Price, remarking that the decline rates in production in shale basins nationwide are "incredibly high." Berman is a petroleum geologist, Associate Editor of the American Association of Petroleum Geolgists Bulletin and Director of the Association for the Study of Peak Oil. He maintains the blog Petroleum Truth Report. "In the Eagleford shale, which is supposed to be the mother of all shale oil plays, the annual decline rate is higher than 42%," he stated. "They're going to have to drill hundreds, almost 1000 wells in the Eagleford shale, every year, to keep production flat. Just for one play, we're talking about $10 or $12 billion a year just to replace supply." Berman believes there's a possibility that this could lead to an economic crisis akin to which happened during the Big Bank bailouts of 2008. "I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from?," he asked the interviewee. Who Will Be Left "Cold, Dark and Hungry" and Living in the "Dark Ages"? It's a deep dive into shale gas production numbers that have led insiders like Powers, Berman and others to conclude that the behavior of the industry is akin to Enron's behavior in the 1990s, described by some as a "Ponzi Scheme" in a June 2011 investigation by The New York Times. "What a glorious vision of the future: It's cold, it's dark and we're all hungry," Chesapeake Energy CEO Aubrey McClendon said of anti-fracking activists in Sept. 2011. "I have no interest in turning the clock back to the dark ages like our opponents do."
The reality, though, is far murkier. It appears the real culprit "turning the clock back to the dark ages" may actually be the unconventional oil and gas industry after all. Dear reader: Our goal is to provide the best energy industry information for you to make sound energy decisions for your company.
The information above is our best effort to provide information regarding the energy markets. It is our opinion only and does not not constitute or include any guarantees or assurances of future accuracy.
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If you would like to discuss fixing a volume/rate/term, please give me a call. We are big proponents of "partial volume" hedges and can help you design a plan that fits your risk/budget. Best regards, Robert Kramb