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Questions on the Long Term Natural Gas Supply-Demand Balance

May 1st, 2013

OMAHA (Capstone Energy Services) – After a very volatile month, the May natural gas contract settled at $4.152 per MMBtu 12% higher than the April contract and 27% higher than the February contract. These increases were primarily caused by a late winter that dragged on throughout the month of March and April. The extended cold weather caused unexpected storage withdrawals that raised concerns about the rapidly dwindling surplus. Prices did move lower this last week, but are still more than $2.00 or twice that of a year ago. Analysts expect prices to decline in the coming weeks back below $4.00 as warmer weather arrives and storage injections begin to reverse the year-over-year deficit. Nevertheless there are some longer term supply and demand uncertainties that will almost certainly keep prices from returning to $3.00 per MMbtu or below.

From a longer term perspective, the availability of U.S. natural gas appears to be abundant. On April 8th 2013, the Potential Gas Committee released their biennial assessment of technically recoverable natural gas resources for 2012, showing an increase of 486 Tcf from the previous assessment, up to 2,384Tcf or 93 times existing annual U.S. consumption. These abundant supplies combined with relatively low domestic natural gas prices, particularly from an international perspective where natural gas is selling from $10-$20 per MMbtu, have prompted numerous wide-ranging initiatives to take advantage of these new resources. Many natural gas intensive manufacturers, such as fertilizer, chemicals and steel, are in the process of expanding U.S. operations. In addition to industrial applications, the availability of these abundant resources has prompted residential heating conversions, expanded vehicle use and refueling stations as well as extensive projects to construct and operate natural gas export facilities. At the same time, many electricity producers are migrating to natural gas fired generation as a replacement for coal units being shuttered due to the excessive cost requirements to comply with new environmental regulations. 244 new electric generation plants with net capacity increase of nearly 32,000 MW are expected to come on line from 2012 and 2016, with more being planned.

All of this demand growth presumes adequate availability of supplies at a reasonable prices. Two interrelated factors will determine the sufficiency of that supply: 1) drilling and production and 2) government intervention. The vast natural gas surplus and low prices that appeared in late 2011 and 2012 caused the drilling rig count to plummet by 60%, which, in turn has caused production growth to begin to level off during the last few months. Now that prices have climbed well above the 2011-2012 lows, increases in drilling and production will likely occur in the months to come. Analysts generally agree that sustained prices well above $3.00 and particularly above $4.00 should result in additional drilling and production. The more troubling factor will be the effect of government intervention. Recovery of the vast domestic natural gas resources presumes the continued use of horizontal drilling and hydraulic fracturing (“fracking”). Many special interest groups, including powerful and well funded environmental interests, are adamantly opposed to expanded drilling of any kind and have mounted a very effective public relations campaign against fracking. Many state and federal government agencies are studying the industry to evaluate the effect on air, land, water and animal life to establish regulations and perhaps restrictions on future drilling and production activities. It is not clear what effect these regulatory activities will have on future drilling activities or what effect they are having on current drilling and production plans. Regulatory uncertainty could very well slow the capability of the industry to respond to reduced supplies and/or high prices and may, over time, create additional premiums in market prices, meaning producers will require higher market prices before engaging in new natural gas exploratory activities.

The price increases experienced since mid-February have been attributed to the cold weather and technical volatility. It now appears that a price correction is underway that should push prices back well below $4.00. Some of the recent upward momentum, however, may encompass a longer term perspective by some traders and fund managers. Unless responsive production capability exists as all of the upcoming new demand becomes a reality, the result will be rapidly escalating prices much to the detriment of all end users and the U.S. economy as a whole.

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By Ed Freeman

Glossary Terms

Glossary Terms

Nominated Volume

The physical quantity of gas requested, typically in MMBtu/day, for a specific contract or for all contracts at a specific point.

Marketing Affiliate

A marketing company that has corporate ties to an interstate pipeline, an intrastate pipeline, or a local distribution company.

Energy Only Providers

Power marketers or other electricity vendors who provide and bill for only the energy component of the electricity consumed by the end-use customer.

Therm

A unit of heating value equivalent to 100,000 British thermal units (Btu).

Real Power

The component of electric power that performs work, typically measured in kilowatts (kW) or megawatts (MW)--sometimes referred to as Active Power.

Injection (Storage)

The process of delivering natural gas into a storage field for future delivery and use.

Price Ceiling

Statutory maximum lawful prices for various categories of natural gas, including gas destined for both the intrastate and interstate markets.

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Energy Delivery Chains

Energy Delivery Chains

Find out more about how your energy is produced and delivered to your business.

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Energy & the Environment

Energy & the Environment

How we assist clients in responding to national environmental concerns.

  • Initiate and manage a "Green" energy procurement program
  • Evaluate national legislative and regulatory initiatives
  • Research state and local energy efficiency programs and incentives
  • Track energy use and related emissions estimate