As we move into the winter season, two things are becoming clear. First, this one will be colder than last year, nationwide. Second, natural gas prices are moving up.
A colder season ahead is an almost statistical certainty. The likelihood of having a repeat of last year's mild winter is quite low. And my second assertion is now supported by several factors.
Until very recently, the changing of seasons was a determining factor in gas prices.
The warm winter throughout much of the U.S. last year certainly contributed to the dive that saw gas prices plummet to near $2 per 1,000 cubic feet (or million BTUs), the NYMEX futures contract unit.
The bigger issue, however, has been the game-changing entrance of unconventional natural gas supply in North America. Both the surplus of in-market stored gas and the ready availability of expanding reserves have been driving factors in lowering prices.
The amount of available gas is staggering.
Known reserves of shale and tight gas, coal bed methane, and remaining free standing volume now allow up to a 25% increase in supply per year into the foreseeable future.
Now, nobody would actually drill that much, because they would destroy the market (the classic example of "drilling" oneself in the foot).
But the ready availability was restraining pricing. That resulted in a period in which gas rig utilization has fallen each month - to its lowest level in over a decade. The industry has been slowing the introduction of accelerating volume into what had been an oversaturated market.
The hottest summer on record also contributed to a steady improvement in price. As the power-generating sector moves quickly toward low-priced gas as the fuel of choice, rising temperatures also increase the need for gas.
But now, at last, the balance is forming.
The inventory is now the smallest in the last two years, as demand picks up in petrochemicals, industrial usage, and even vehicle fuel prospects.
The major thrust is beginning.
This will not be a straight line for natural gas prices. Volatility cuts in both directions.
But one thing is clear.
The gas market is about to get a whole lot stronger...
2013 Natural Gas Prices: Coming Back Strong
At the moment, natural gas prices are again approaching $3.60, an 80% increase from earlier in the year.
At a major pipeline conference in May, I estimated the price would be $4.50 by the end of next year. It now looks like we will reach that point much earlier. Some are now suggesting a rate of $4.35 could be the norm by the end of the first quarter of 2013.
Keep in mind that there are two significant new demand streams coming over the next 18 months. If you've been paying attention, you already know what they are.
The first is the continuing rise in natural gas usage for electricity production. The second is the revolution coming in liquefied natural gas (LNG) exports from North America.
We have begun to see the move from coal to gas in electricity generation, but this will be accelerating as we move forward.
Remember, 90 GW of coal-fired generation will be coming off line by 2020, due to the age of the facilities. In addition, upwards to 30 GW will be retired because of new non-carbon emission requirements (mercury, sulfurous, and nitrous oxides).
Each 10 GW replaced by natural gas means the need for an additional 1.2 billion cubic feet per day of gas.
Last year at this time, I was giving an address to the executives of western U.S. power producers meeting in Pebble Beach, Calif., and I was told there is not a single new coal-fired or co-fueled (using coal and natural gas) generator in the planning stages anywhere in the U.S. Expectations are that all new plants will be using either gas or renewables.
If only half of the capacity needed just for replacement ends up being fueled by gas, that will eliminate the current market surplus... more than three times over.
Then there is the LNG export surge, scheduled to begin by 2014.
LNG Exports Will Push Demand Further
By 2020, international projections say that the U.S. alone will account for at least 9% of the world LNG trade by 2020 - that's from 0% today. That could translate into a second huge multi-billion cubic foot per day demand.
The demand scenario forming is a primary reason why the industry is gearing up for a major resurgence. Another is the 18-month average life of main flow from shale gas wells.
As the market worked through low prices, operating companies could at least obtain continuing revenue from existing production wells. Once the gas starts coming up, 90% of the expenses on a well are already "sunk" costs. The longer the gas flow remains, the better the overall profit margin.
Now, the life expectancy on many of those wells is ending. That means there needs to be a new generation of drilling to replace the older. Companies do have a phased-in approach to this, which is to say, they hardly wait until the flow stops to drill a new well.
But with the low prices, the schedule has been delayed. As the price improves, therefore, we should expect to see a new acceleration in well completions. This benefits the producers, the field service companies, and the midstreams providing gathering, pipelines, storage, and initial treatment. Not to mention their investors.
This is not going to be a straight line. There are now some significant bottlenecks and regional network problems surfacing.
Nonetheless, the natural gas market is about to get a whole lot better.