Why you shouldn’t bet on higher natural gas prices

Stockhouse ^ | April 2, 2014 | Matt Badiali

[thackney]

In January, 40% of natural gas production in North Dakota went to waste.

You read that right. 400 million cubic feet of natural gas was lit on fire and burnt. But that's peanuts compared to how much total natural gas goes to waste every year in the U.S.

And it's why I see natural gas prices being low this year...

Longtime Growth Stock Wire readers know about the U.S.'s booming oil production in shales like North Dakota's Bakken and Texas' Eagle Ford and Permian Basin.

Natural gas is a byproduct of oil production... And the shale plays are producing more natural gas than oil companies know what to do with.

As I told you last week, natural gas production is rising every year. According to the U.S. Energy Information Administration, natural gas production will grow 2.5% this year and another 1.1% in 2015. The overabundance of supply has kept prices low. And with natural gas prices so low, oil and gas companies have been slow to build the infrastructure to transport all the natural gas.

That's what happened in North Dakota earlier this year. There were too few pipes and not enough processing capacity. That's true in many parts of the U.S.

I remember visiting the Eagle Ford Shale in Texas in 2010 and seeing natural gas flares over practically every hill. "Flaring" is when wasted natural gas is safely burned off.

The table below shows the difference between the gross production and marketed production of natural gas in the U.S. That's the volume of gas produced from wells and the volume sold. After removing some other gases, the difference between the two is wasted natural gas. The final row shows the percentage of marketed production that was wasted.

As you can see, we wasted 3.8 trillion cubic feet of natural gas in 2013. That's 15% of the volume sold. At $4 per thousand cubic feet (MCF), that amounts to $15.2 billion wasted because pipelines don't exist to take it away.

This is the main reason I don't see natural gas prices remaining above $4 per MCF the rest of this year.

There is so much supply that we wasted over 10% of our production last year. This is supply that is already being produced. It could easily go right into pipes without drilling more wells.

Until infrastructure catches up to the overabundance of supply, low natural gas prices are here to say. That's why investors shouldn't bank on higher natural gas prices this year.

[octex]

... the gas revenue not recovered is relatively minor in comparison to the oil revenue gained, and when the pipeline is connected to feed that production to the gas revenue will be a bonus.
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Good posting and a good explanation of why there is flaring.

[Smokin' Joe]

Thanks!

[DaveA37]

is the writer silently suggesting we invest in the means to transport this surplus? I’ll consider buying into pipe manufacturing for now. Any other great opportunities on the horizon? (I’m staying away from rail cars, at least for now.)

[Smokin' Joe]

Rail cars will get a retrofit, likely, there are over 400,000 of them hauling crude oil, and it is likely they will get collision shields (not just the half-shield, but full end shields) and new valving in a retrofit to address safety concerns.

As for pipelines, we have seen the incredible resistance from everyone from environmentalists to the Government hold up the Keystone XL pipeline for over a decade. I have little faith that we will see adequate growth in capacity although I expect some in the next decade, mainly for Natural Gas and NGLs (especially after the propane shortage east of the Mississippi this last winter.

There may be some developments along the lines of LNG export to help relieve the EUs dependence on Russian Natural Gas, but I think the overall effect will be minimal there.

It is primarily a question of which sector will be most adversely affected by the environmentalists campaign against pipelines and rail transport (the two safest forms available). Rail car use will remain strong, just watch for who is doing the retrofits.

[ripley]

“I don’t think I’m the one who is confused.”

You aren’t and neither are they.

They’re engaging in doublethink.

IMHO

[thackney]

However, if the gas found in a particular oil drilling site is too low of a concentration, say 550 but/ cu ft, it is unsuitable for blending because far too much expensive gas would be required to make the end product burnability acceptable.

For natural gas to have such a low BTU rate, it must have significant contamination with non-combustibles like CO2.

Even blended with higher BTU natural gas liquids, it is not going to be accepted as pipeline quality gas. The standards require more than just BTU rate.

Just like a gas with too high a BTU rate, that low quality gas will needed to be cleaned up at a gas processing plant.

For example:
http://msdssearch.dow.com/PublishedLiteratureDOWCOM/dh_009b/0901b8038009bf53.pdf

[Nuc 1.1]

Thanks for that info.

[cartoonistx]

I was assuming the gas was scrubbed at one point (plant lab) in order to get an accurate BTU assessment.

[thackney]

If the natural gas had been processed (cleaned) it would not have a BTU content that low.

Pure methane is 1,011 BTU/ft3.

[Organic Panic]

Why? EPA and democrats.

[Praxeologue]

oil prices completely crash

Thank you for your insights.

Off topic for a natural gas read, but do you see the Bakken more exposed to an oil price decline than Eagle Ford? Production cost estimates seem to use widely different methods.