THAT WACKY NAT GAS PRICE

End to low natural gas prices 'inevitable'
David Parkinson, January 17, 2012 (Globe and Mail)

"After three years of deeply depressed natural gas prices (NG-FT) and facing another to come, Canada’s biggest natural gas producer is losing its stomach for the commodity...Encana Corp., (ECA-T)...[will] steer its multibillion-dollar capital spending program for 2012 toward oil and natural-gas-liquids drilling, and away from the “dry” gas deposits…With natural gas prices mired below $3 (U.S.) per million British thermal units – the first time in a decade that gas has been this cheap in the winter heating season – and with bloated inventories and unseasonably warm weather pointing to little relief in sight, drilling for gas is a money-losing proposition…"

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"…The North American industry faces the prospect of losing billions of dollars just to replace the natural depletion of existing wells and maintain production at 2011 levels…And while many experts think the oversupplied market could keep prices depressed for much of this year, they say this growing reluctance to invest in gas production is bound to eventually take a big bite out of supplies, and finally turn prices around…[though] for more than a year many people have been saying that low prices were going to slow exploration and production, and boost prices – yet prices are even lower now than they were at the start of 2011…

"One factor is that as producers have shifted their focus toward liquids-heavy gas properties, they have continued to unlock dry gas in the process – and they have been able to use the ample cash generated by liquids production to justify bringing otherwise uneconomic gas on stream…Hedging programs – under which producers agree to sell future production at fixed prices – have also helped sustain gas production…[Though] the Nymex natural gas futures contract for delivery one year from now is priced at a mere $3.67… shrewder hedgers have still been able to lock in comfortable prices for 2012…"

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"…[Abundant] shale wells not only cost ‘three to four times’ as much to develop as conventional gas wells, their rate of depletion – the amount production declines over time, a natural phenomenon with all wells –….has risen from about 23 per cent five years ago to more than 32 per cent now…[C]ombined with the 20-per-cent surge in North American gas production in the past five years, (which makes for more and more depletions to replace each year), has meant it now costs the industry about $22-billion each quarter just to replace the annual depletions and maintain current volume levels. Yet those producers are seeing only about $12-billion a quarter in cash flow…The capital gap is now…40-billion a year…"