The abundance of US shale gas, a game changer for the natural gas industry in the country, has also led to a misconception that the US is vastly oversupplied, a ConocoPhillips official said Wednesday.
"The talk of shale makes everyone think we're way oversupplied," said Jim Duncan, ConocoPhillips' chief analyst and commodities markets strategist, at the LDC Gas Forum Rockies & West in Los Angeles. "The reality is that we're not. The signposts are already here."
Although global gas reserves are estimated at more than 6,000 Tcf, with 23% of that in North America, several factors that could quickly throw supply/demand fundamentals off-balance, Duncan said.
One of the largest risks to gas supplies is the shift in drilling rigs away from pure-play gas fields to oil- and liquids-rich gas fields, he said. This ongoing shift, which likely would not cause a drastic jump in gas prices up to $10/MMBtu, could produce a $2-$3 move in gas prices that would cause somewhat of a roller coaster effect, Duncan said.
"We're losing natural gas wells because the return on investment is not there" Duncan said. "There's more dimensional variability with crude oil. That's a problem if you think we're going to be oversupplied."
Another factor that could weigh heavily on gas supplies is power generation, Duncan said. A little more than a year ago, nuclear was among the fuels being considered for expanding US power supplies to help meet growing demand. The tsunami and subsequent events in Fukushima, Japan, however, quickly raised some eyebrows and caused gas prices to rise, Duncan said.
"It was muted because gas prices were low, but there was a direct impact," Duncan said, adding that the retirement of coal plants, whether due to age or to environmental regulation, also could boost gas demand.
Concerns about hydraulic fracking also create uncertainty over future gas supplies, especially if public opposition leads to increased regulation and more conventional, higher-cost production, Duncan said.
"There has been a dramatic shift in production," Duncan said. "Ten years ago, we weren't talking about fracking wells, even though we've been doing it for decades. Production continues to grow."
In addition, LNG exports and an increase in natural gas vehicles also could disrupt the supply/demand equilibrium, Duncan said.
And while Duncan said he remained bearish on natural gas, weather could provide some upswing to the market as the last two winters have set records in the US and the last summer was the hottest in 60 years. "In Houston, it never got above 120 degrees. It never got below 105 either," Duncan quipped.
"The East Coast had a hurricane and an earthquake," he said. "You would think this would have had a huge impact on the market, but it didn't. It was fairly muted," Duncan said. "Whether we like it or not, this market is defined by its supply/demand fundamentals."
