Natural gas industry ready to rebuild depleted U.S. supply

U.S. utilities have withdrawn a record amount of natural gas from underground storage to meet heating and power needs during an extremely cold winter, but gas producers say they are confident they can rebuild inventory.
 

By Eileen O'Grady

"We believe North America has the capacity to supply far more natural gas than we are doing now at a reasonable price," said William Maloney, Statoil (STO)'s executive vice president of development and production for North America, speaking at the IHS CERAWeek conference in Houston, an annual meeting of global energy leaders.

Some traders have expressed doubts that inventories would be rebuilt in time for next winter, but Maloney said the biggest challenge is not supply, but demand.

"Is there enough demand to lead to sustained higher prices and can matching midstream and upstream capacity happen in a continuous way?"

Maloney noted that the number of rigs looking for gas has fallen, but gas production has kept rising as the industry finds more efficient methods to drill and complete wells in U.S. shale formations.

At Statoil, which produces in the Marcellus and Bakken formations, drilling efficiency gains have been in the 25 to 50 percent range, Maloney said. "We are not going to stop improving."

The long and bitterly cold winter season has reduced gas in storage to the lowest level in a decade, according to government estimates, leading some traders to project that gas inventory will end the winter season with less than 1 trillion cubic feet, much below the record storage levels seen in the past few years as shale gas production soared.

"In the space of just a few short months, the multi-year surplus has disappeared with the rapid system-wide destocking that has fundamentally altered our outlook on the market," Teri Viswanath, director of natural gas strategy at BNP Paribas, said in a note earlier this week.

"Despite the industry's best efforts to bring additional supplies to market, we believe that it will take more than a single injection season to swing the market back into equilibrium," Viswanath said.

Maloney declined to comment on the current storage level, he said Statoil has recently brought new wells online after falling a little behind. "The rigs are not going away; we will continue drilling," he said.

Bob MacKnight, an IHS director, offered a more cautious outlook, saying gas prices must rise to $5 per million British thermal units "for a sustained period" to get producers to boost drilling activity.

"The forward curve is telling them not to go out and drill a gas well," MacKnight said.

To meet the growing appetite for gas to fuel new power plants and as a feedstock for the petrochemical industry, additional infrastructure must be built, said William Lawson, vice president of The Williams Cos.

"Infrastructure is the vital link to allow producers to achieve the economic return they need in order to sustain development and keep rigs in the basin," said Lawson. "It is also the assurance that the demand (side) ... needs to have to invest billions and billions in growing their consumption of these fuels."

The Marcellus shale region alone could need $26 billion in gathering lines, pipelines and other processing equipment in the next decade, Lawson said.

While the producers said abundant gas from shale formations will supply the United States for many decades, cost and regulation will always be issues, said Rob Franklin president of ExxonMobil's gas and power marketing company.

"In January, we broke the record for (gas) demand five times," said Franklin. While prices spiked in response to some gas constraints, there were few problems, he said.

"There are enough rigs," he said. "We are more than able to keep up."