News Column

Natural gas drillers face a conundrum

February 16, 2014


As a natural gas price rally fuelled by the harshest winter in decades threatens to stretch beyond this spring, North American drillers face a conundrum.

In theory, the return to nearly $5 per million British thermal units (mmBtu) gas prices for futures contracts through March 2015 should offer just enough economic incentive to coax extra gas from the ground, allowing inventories to rebuild from potentially critically low levels over the summer.

Yet so far, North American drillers are reluctant to buy into the first bull market they have seen in years, fearful that the weather-induced rally will not last and betting that oil output still offers a more certain return.

ConocoPhillips wants benchmark natural gas prices to remain over $5 for as long as two years before the company boosts spending on natural gas, chief financial officer Jeff Sheets said in an interview.

"We won't be leaders in getting out there and drilling natural gas," he said.

Call it the shale bind: with abundant supplies from shale fields such as the Marcellus in the US Northeast or the Haynesville in Louisiana, there is little hope of a sustained revival in prices, and thus companies with long-term investment cycles are loathe to shift their focus.

The number of rigs drilling for natural gas in the US fell by seven over the past week to 351, the lowest since 1995, according to data from oil services firm Baker Hughes.

Yet market analysts are also starting to look for signs of additional drilling that would help replenish stocks, without which prices may remain elevated for months longer. After languishing below $4.50 for years, prices surged last month to more than $5, their highest in four years.

This year's bitingly cold winter was initially written off as a short-term anomaly, causing isolated but dramatic price spikes in markets such as New England, where pipeline capacity was insufficient to meet the surge in demand.

But as the cold persists and expands, supplies are starting to strain across the country, forcing states including California and Texas to urge consumers to reduce power use to ease strain on the grid, partly because of limited gas supply.

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Source: Oil & Gas News

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