Low natgas prices constrain producers from expanding

By Al Greenwood

HOUSTON (ICIS)–US reserves of natural gas are large enough to meet what many expect will be a spike in new demand, but persistently low prices will prevent companies from expanding into new areas, experts from the industry said on Wednesday.

Meanwhile, more infrastructure is needed to bring not only natural gas to demand centres but natural gas liquids (NGLs) to petrochemical and other consumers, experts said.

Natural gas prices need to stay consistently above $5/MMBtu to encourage companies to drill in new reserves of dry gas, which contain mostly methane, said Bob MacKnight, a director at IHS. He made his comments during a presentation at the IHS CERAWeek conference.

These new reserves are beyond the core areas that already are being developed, he said.

As long as natural gas prices persistently remain below $5/MMBtu, exploration and production (E&P) companies will continue to favour reserves that have oil or large portions of NGLs, he said.

The persistently low prices come as natural gas use is expected to increase in the US.

An increasing number of power plants are switching from coal to natural gas as a source of fuel.

US could export more liquefied natural gas (LNG) if the government approves more export licences.

Natural gas demand could also increase from the chemical industry, which is building new plants that will use the product both as a fuel as well as a feedstock for methanol and nitrogen fertilizers.

“We should see significant increases in demand in the next 10 years,” said William Maloney, Statoil executive vice president of development and production in North America. Maloney was also speaking at IHS CERAWeek.

The US has the reserves to meet this demand, he said.

“We can supply far more natural gas than we are doing now at a reasonable price,” Maloney said. “The biggest challenge is not supply.”

Instead, pricing has to be reasonable, he said. At the least, natural gas prices have to be high enough to justify the long-term contracts that producers make with midstream companies, which develop the infrastructure needed to process natural gas, separate the valuable NGLs and ship the processed fuel to customers, Maloney said.

NGLs play a key role in gas production because their sale can increase margins, said Bill Lawson, vice president of corporate development and project execution for Williams, a midstream company.

“The NGLs have been providing producers that key uplift and extra margin to make those projects and development plays more attractive,” Lawson said. “It keeps rigs in the basin and development going.”

However, those NGLs need to reach the major consumers in the US Gulf Coast. That is why the midstream industry is so important. It is responsible for building the infrastructure that can connect the Gulf Coast petrochemical industry to new NGL sources, such as those in the Marcellus and Utica shales of northeastern US.

“The critical component that is missing today is the infrastructure,” Lawson said. “We stand right in the middle of that question.”

For the midstream industry, one of its biggest challenges is the tangle of permits it must receive before building a pipeline, Lawson said.

For pipelines over land, Williams has to deal with more than 33 entities that have overlapping rules and regulations, he said.

As a result, it costs the company 3.8 times more to build a pipeline on land than it does to build an equivalent length in the Gulf of Mexico, Lawson said.

Even though a Gulf pipeline is more technically challenging, it is overseen by one regulator, which makes permitting simpler.

Another challenge is litigation. Increasingly, groups that are opposed to energy production are challenging midstream projects, Lawson said.

IHS CERAWeek lasts through Friday.