Wednesday, September 23, 2009

The Fightin' Side Of Me

More about natural gas, the economy, common sense, politics, the environment, the Obama Administration, and a little fun. The solution to America's energy, employment and national security is right under our feet, in our back yards. Wake up America.

Click on the link to the Merle Haggard song on youtube..
Peter

http://www.youtube.com/watch?v=0n552gP9X40

Who's Looking At Natural Gas Now? Big Oil

September 23, 2009

Custom image: Digging a shallow natural gas well in Clarksburg, W. Va.
Enlarge Tom Gjelten/NPR

Gastar Exploration, a small Texas company, is digging a shallow natural gas well in Clarksburg, W.Va. Gastar's business strategy is to limit its exploration and drilling to a minimum in the Appalachian region until it sees how larger gas companies fare in the area.

Custom image: Digging a shallow natural gas well in Clarksburg, W. Va.
Tom Gjelten/NPR

Gastar Exploration, a small Texas company, is digging a shallow natural gas well in Clarksburg, W.Va. Gastar's business strategy is to limit its exploration and drilling to a minimum in the Appalachian region until it sees how larger gas companies fare in the area.

In the energy world, Big Oil has long been the key player — with one notable exception: The natural gas business in the United States is dominated by small, independent companies. More than 80 percent of U.S. natural gas supplies are produced by companies with a market capitalization of less than $500 million. On average, these companies have only a dozen employees.

But their business is booming. New production techniques in recent years have enabled companies to extract natural gas from shale rock formations deep underground. As a result, estimates of accessible natural gas reserves have been revised dramatically upward. Small gas producers can justifiably take the credit for the transformation of their industry.

"The major oil companies haven't been paying attention to the U.S. for decades," says Robert Hefner, a 50-year veteran of the natural gas business with a company of his own, GHK Exploration, in Oklahoma City. "It's been a lot of independents like us that have found all this gas, developed the technology and made it happen."

Hefner attributes the proliferation of small natural gas companies to the fact that individual landowners generally retain the mineral rights to their own property. "In America, if [your] dream is to drill a well, you can go out and drill a well," Hefner points out. "As a result, there's been about three-and-a-half-million wells drilled in America over the years, versus about a million and a half for the rest of the world."

Mom-And-Pop Businesses

Many of those natural gas wells are mom-and-pop operations, or began that way. Often they evolve into slightly larger companies, but even the publicly traded companies are generally small. Those that survive in the energy world have learned to leverage their size.

U.S. Energy Consumption, By Fuel Type

Natural gas accounts for just 22 percent of the nation's energy consumption. Natural gas advocates say that increased use would mean a cleaner environment and less dependence on foreign oil.

A pie chart showing U.S. energy consumption

Notes

Percentages do not total 100.

"We certainly don't have an advantage when it comes to capital," says J. Russell Porter, chairman and chief executive of Gastar Exploration, a Houston-based company with just 23 employees. "The large companies can spend a lot more money than we can. But we can be very quick on the draw, if you will, to seize an opportunity and buy into a new concept or a new area that we think could be prospective for natural gas. If we do that, we usually have a first-mover advantage."

The agility of small companies is an important strength in a field where the ability to move fast is key to maintaining a competitive edge. But there is also a more practical reason small companies dominate the U.S. natural gas business. Typically, a new gas well produces in abundance in the year after it's opened, but then production begins to decline. If a natural gas company is to keep production and revenue steady, it has to keep drilling new wells. The energy majors may not have the patience for that effort.

"Big oil companies like big projects that they can manage over 30 and 40 years," says Nikos Tsafos, natural gas analyst at PFC Energy in Washington. "They prefer those over the project that you need to stay on top of every single day, every single month."

There's no dispute on that point from the oil majors. "With a company our size, we have to have a larger scale," says Patrick McGinn, spokesman for Exxon Mobil's exploration arm. "We have to have a potential resource that has more capability for us to go after."

More About The Quest For Shale

Modern Shale Gas Development In The United States: A Primer by the U.S. Department of Energy (PDF)

The American Clean Skies Foundation is a nonprofit devoted to educating the public about natural gas and its relation to renewable energy and energy efficiency.

The Ground Water Protection Council monitors regulation of natural gas drilling and production in the U.S.

Worldwatch Institute, an independent research group based in Washington, D.C., conducts research about energy and climate change.

Managing Innovation And Risk

The natural gas industry, in fact, serves as a case study demonstrating how business strategies vary according to a company's size. From small to large, energy companies manage innovation and risk in ways appropriate to their own circumstances.

Gastar Exploration, like many other natural gas companies, is currently focused on the Marcellus shale formation in the Appalachian basin, perhaps the most promising area for natural gas development in the United States today. But the company has so far limited its activity in the area to a few shallow wells in West Virginia, choosing to let a few larger gas companies take the lead in the area.

"We look at what they're doing," says Gastar CEO Porter. "[We] let them drill some of the early wells, try to determine which drilling techniques work the best, and then once they have done that trial and error and established a pattern that works, we can go in and design our wells without having that trial-and-error phase, which can be very expensive."

The challenge of managing risk is important in any new industrial venture. In the natural gas business, the smallest companies in some ways can be the most adventurous. The new investments they make are tiny compared with what a large company would make. But they will still try to shift as much of the risk to their rivals as they can, just as Gastar is doing.

A Magnet For Big Oil

Paradoxically, the biggest energy companies follow a similar strategy, though in their case they try to shift risk to their smaller rivals. Shale production in the United States looks so promising right now that the big oil companies are thinking about getting back into the natural gas business. Exxon, for example, is looking at some possible shale "plays" in the United States, but — like Gastar — the company is biding its time before making a big move.

"We've taken a couple of years to really work on the technology that's required to do the exploration and production of these kinds of shale plays," says spokesman McGinn. "Doing the homework and doing the technology development takes some time for us, and we are willing to wait for that."

The possibility of Exxon's entry into the U.S. shale gas business would have major implications for a "micro-cap" company like Gastar Exploration, but Porter, Gastar's CEO, is not overly concerned.

"We can live on the fringes if necessary," he says. Or Gastar could just let the big oil companies take over some of its gas operations — for the right price.

"If Exxon came in and wanted to become a dominant player in the Marcellus shale, I'm sure there are lots of small operators who would be willing to sell out to them if they were willing to pay full value," Porter says. "There's always going to be another play for us to go invest in and start creating value all over again."

It's all part of the natural gas business game.

If We Make It Through December

According to the following article in the "Calgary Herald", the production of "conventional gas" in Canada and the United States is declining rapidly because of a lack of drilling activity. This could lead to rising gas prices. The big question is whether this production shortfall can be met by increasing production of "unconventional" shale gas. It is going to be an interesting winter. With that in mind, here's an appropriate song by Merle Haggard. Click on the youtube link to hear it.
Peter

http://www.youtube.com/watch?v=Z-IJxTd8dCo

Mapping the path for natural gas

By Peter Tertzakian, Calgary HeraldSeptember 21, 2009
Peter Tertzakian (source)

No birthday party is complete without balloons. Beyond livening up the venue with ornamental colour, balloons are meant to be popped. Kids love the festivity and it's all in good fun. Also, balloons can be blown up, pinched tight at the stem, and then let go to rocket around the room in a spastic rush of air. That's fun too, until someone loses an eye as your mother may point out; or unless you think of it in terms of the natural gas business.

It hasn't been much of party watching shrinking natural gas sales and producing companies on the brink of bankruptcy, but in a twisted way the party may just be beginning.

Like watching an airborne balloon deflate, Canada's conventional natural gas production is declining rapidly. Just this year we've lost about 1.0 Bcf/d of production (not including production that's been shut in). Since peaking in 2006 at well over 16 Bcf/d, volumes are now down 16% or 2.5 Bcf/d. By now everyone should know that much of the incentive to drill for natural gas in the Western Canadian Sedimentary Basin (nearly all in Alberta) has dried up due to high costs followed by low prices that have plagued the domestic industry for close to three years now. The dynamic is simple: if the rigs aren't out drilling at a certain pace, the physics of the rocks take over and natural gas reserves start declining. This dynamic is irrefutable and one of the few variables that the financial markets can count on as being predictable.

But Canada's situation is not unique. Production is now declining rapidly in high-cost, conventional geological regimes in the United States too. Back in August of 2008, the rig count in conventional US regions dropped precipitously from 800 to 200. That's when the fingers let go of the American balloon. The “blow down” hasn't been too noticeable up until now, because the aggressive growth of prolific, low-cost shale gas has been able to backfill what was being lost in the conventional regions. Behind the scenes it's been an almost seamless substitution of a high-cost product with a low-cost substitute, all facilitated by new technology applied on a large scale.

In fact, this gas-for-gas substitution is nothing new. Natural gas production from the US Gulf of Mexico has been on a steep decline since 2001, dropping from 14 Bcf/d back then down to about 7.0 Bcf/d this year. During that time period growing unconventional gas volumes from the onshore Barnett Shale in Texas backfilled the blow down in the Gulf almost one-for-one. But now shale gas regions have a challenge that is twice the size of the Gulf of Mexico: backfilling the 30 Bcf/d of conventional onshore production that's now declining by an estimated 17% per year.

The billion dollar question for 2010 is whether or not unconventional gas production in now-legendary plays like the Barnett, Haynesville, Fayetteville, Woodford, Marcellus and even Canada's Montney, to name a few, will be able to collectively respond fast enough to offset estimated conventional declines in 2010 of 5.0 Bcf/d in the US, plus another 1.0 Bcf/d in Canada. Theoretically it's possible, but nobody likes to talk theory at a party. Indeed, there are many practical constraints to boosting near term production including thin cash flows, stretched balance sheets, impatient bankers, tightened service industry capacity, and the strained logistics of mobilizing oilfield equipment once the price signals are convincing enough for E&P companies to spend money again.

In the long term, beyond 2010, shale gas and other large-scale unconventional gas plays will be increasingly dominant and able to offset conventional production declines. But that's the long term. Next year, it's quite possible that only half of the expected 6.0 Bcf/d of conventional losses in North America will be replenished. It's a scenario that speaks to benchmark continental prices rising above $US 6.00/MMBtu again, all else being equal.

This coming winter will be interesting. A mild combination of a colder-than-average temperatures, a gradual recovery in industrial demand and the gravitational pull of declining conventional production have a very good chance of collectively tightening up the oversupply that the natural gas industry has been living with for over a year. I give this near-term scenario at least even odds, and in part that's why natural gas prices have been rallying recently. After all, nobody wants to miss the party.