Where are natural gas prices headed? Energy industry executives surveyed at a conference Wednesday in Houston said they expect prices to continue to move higher for at least the next several years.
The RBC Capital Markets Energy & Power Conference includes companies that rent rigs, drill for oil and gas, and turn what’s found into consumer products. In other words, they are the ones out there looking into the ground to see what’s there.
That’s why it’s worth listening to that this group has to say about where do the price of natural gas is headed over the next three years.
Their forecast calls for gas prices to hit $5 per thousand cubic feet and continue to rise: $5.03 this year, $5.16 by the end of next year, and $5.32 the year after that.
That means the group doesn’t see the recent price spike easing back to historical levels of below $4 per thousand cubic feet.
The group was also asked: How bad is the natural gas shortage? More than half said it is as bad or worse than the oil crunch of the 70’s. And 41 percent said that they picture an international natural-gas cartel — like the Organization of Petroleum Exporting Countries — in the future.
“That suggests that the investment opportunities would not just solely be domestic, which is what we normally think about,” said Jarret Carson, an analyst at RBC Capital Markets. “I looked at international opportunities for natural-gas investment and the use of (liquefied natural gas) too and also long pipelines, say, from Canada to ship the natural gas into the U.S.”
Half of those at the conference see hydrogen as a viable alternative to dependence on outside sources. And RBC analysts say they’re taking a harder look at investments in that group. Carson picked four companies among the stand outs: Hydrogenics, Quantum Fuel Systems, Fuelcell Energy, Ballard Power Systems. (RBC has done investment banking work for Ballard Power.)
As for crude oil prices, the group sees it averaging $28 a barrel for the next two years — below that $30 mark where oil has traded for much of this year.
All this leaves plenty of choices for investors to consider, according to John Kilduff, an analyst at the brokerage firm Fimat USA.
“I think the pure play type of exploration and production companies like Apache and Devon are attractive,” he said. “But I think the integrated companies stand to benefit because of their portfolio of [exploration and production assets] and also for their portfolio of [liquefied natural gas]. And I think it also is going to make the Alaska pipeline very bankable and a crucial part of the energy bill that is pending.”
Meanwhile, natural gas discoveries locked deep below the Gulf of Mexico’s shallow waters will remain limited to a handful of drillers operating in the play until wider exploration makes it a less risky undertaking, according to the drilling company executives at the conference.
Deep shelf gas, so-called because it is located 3 miles or deeper below the shallow waters of the gulf’s Outer Continental Shelf, is the latest hot play among oil and gas wildcatters. These deep shelf wells account for about one-fifth of all exploration wells in the gulf, and industry watchers expect that number to rise as returns from the rest of the gulf continue to decline. New government incentives promoting deep shelf drilling will also help.
But the expensive learning curve will keep most players out until the region becomes better-explored, said energy executives.
“Ultimately, everyone needs to find big fields to make this play,” said Scott Griffiths, executive vice president and chief operating officer of Spinnaker Exploration Co.
The target range for prospects are those of 250-350 billion cubic feet (bcf) and larger, which are enormous given that the mean size of gulf reservoirs is around 27 bcf.
“That will support a larger cost structure than the shallow shelf is supporting,” said Randy Bartley, senior vice president and chief operating officer of El Paso Corp.’s production arm.
The costs of drilling at that depth include expensive seismic surveys beforehand and then the hiring of the most powerful drill rigs in the world, which are the only machines that can go that deep.
With a total cost in the range of $15-20 million, deep shelf wells are two or three times the cost of a conventional gulf well.
Experience right now is what gives El Paso and other deep shelf operators an economic advantage over other competitors contemplating a move into the play, he said.
“But by being able to do these things through the learning curve, you can drive these costs down,” Bartley said.
El Paso said its finding cost for for the deep shelf is $1.65 per thousand cubic feet, making it economical with gas currently selling in the $4-5 per thousand cubic foot range.
Fewer than 2,000 wells have been drilled in the gulf’s shelf at 15,000 feet or deeper, roughly the same number of wells that had been drilled in the entire gulf by 1958.
El Paso is far and away the biggest operator in the deep shelf, having drilled 70 percent of the deep water wells in recent years.
Supermajor ChevronTexaco Inc. is El Paso’s closest competitor in the deep shelf, with large and medium-sized independents like Spinnaker, Newfield and Anadarko Petroleum filling out the rest of the field.
Reuters contributed to this story.