“So if it does happen, and we do run out of storage, it could drive natural gas to $1.00 or even lower.” — Christopher Jylkka, principal/manager of Boston Energy Trading
“Natural gas prices are likely to rise a lot — say $12+.” — Gail E. Tverberg of Tverberg Actuarial Services
That’s quite a spread. So which will it be? $1 per 1,000 cubic feet or $12 per 1,000 cubic feet? Enquiring minds want to know . . . particularly Iris Evans, our provincial finance minister.
Her forecast for the strength of our economy over the next year or so is based on a natural gas price of about what it is now (ie, in the $4 range).
The people who work in the gas industry (or who have been laid off) also want to know. Investment in new drilling (and therefore jobs) would require even higher gas prices.
And I and a lot of other homeowners would like to know; $12 per 1,000 cubic feet means much higher heating bills in the winter. And it also means that we will be investing more in home energy retrofits . . . if we’re smart.
The people who see $1 gas in the future are thinking about natural gas storage.
Natural gas has an off season when it’s warm outside. It is still used for generating electricity all year round, but in the spring, summer and fall, a lot of production is fed into underground storage (mostly old depleted reservoirs, but also salt caverns).
The glut of natural gas from the recent investment in shale gas drilling has helped to fill these reservoirs almost to the brim. Once that gas reaches the brim, there is nowhere else for it to go.
And when there is nowhere for it to go, the price will drop like a rock.
The other factor in the $1 gas scenario is the forecast of an El Nino weather event for this winter. Environment Canada is telling us that we may not need nearly as many woollies (and natural gas) in the next few months.
So where is the $12 forecast coming from? Tverberg realizes the storage and weather factors, but she is looking a bit further into the future (perhaps several years, since most forecasts are for $5 or $6 in 2010).
She is also looking at the inherent shortcomings of the recent shale gas blitz.
Shale gas wells produce a lot of natural gas in a very short time, but soon thereafter, the production tends to drop off a cliff. The first year decline rates for individual wells in the various regions in North America range from 50 to 90 per cent.
This can be compared to traditional gas wells from the 1970s, which had yearly decline rates as low as 15 per cent or so.
So we know that the economics of shale gas production over a period of several years is likely worse than that of conventional gas production. In fact, Jonathan Wolff, from Credit Suisse Equity Research has estimated that U.S. gas production in general now needs prices over $8 in order to make a 10 per cent return on investment (compared with an estimated $3.58 in 2000).
The complicating factor is that shale gas production on a grand scale is relatively new, so we will probably only have a good idea of its economics in hindsight.
There have been colossal capital investments up front, resulting in the present glut.
Now, a year later, we have an equally huge disinvestment in active drilling rigs. That, combined with the steep decline rates in gas production from individual wells will eventually transform the glut into a drought.
The main question is: how soon?
But the other question is: can industry and governments cope with these types of situations over the long haul?
If you type “natural gas” and “roller coaster” into Google, you’ll wind up with 72,000 hits.
At this point though, I’m thinking that Iris Evans is hoping for a ride that’s a little more sedate.
Evan Bedford is a local environmentalist. Direct comments, questions and suggestions to email@example.com.