Newletter 1 June 2010
Content
HNG’s Houston Energy News
Volume 1, Issue 1 June 23, 2010
A CONTRARIAN MAKES ANOTHER CALL – THIS TIME, NATURAL GAS
Special points of interest:
U. S.Natural Gas Production to decrease Canadian Natural Gas Production and imports to decline Month to Month production declines expected to begin in the 2nd Qtr 2010 EIA to use data from lat 6-18 mos instead of last 2-7 yrs to estimate production 50% of all gas production from wells drilled in last 3 yrs— 1/3 from wells drilled in previous yr Shale gas only 6% of national production, despite accelerated drilling
Long & Littell – doesn't buy the prevailing wisdom that New York Mercantile Exchange natural gas prices are dead in the water, stuck around $4 to $5
A CONTRARIAN MAKES ANOTHER CALL – THIS TIME, NATURAL GAS
Henry Groppe was a lonely voice when he forecast the right oil price. He’s now going against the grain on another fuel, David Parkinson writes
Mr. Groppe – the octogenarian patriarch of Texas petroleum industry analysts Groppe
(U.S.) per million British thermal units even as demand recovers, awash in supplies and with much more on the way.
No, his analysis (and more than 50 years of experience) tells him that gas inventories are about to get a lot tighter, that new supplies are overstated, and that prices are headed north of $8 by the end of summer. Why is he so sure he's got it right and most everyone else has it wrong? Because, he contends, shale gas – the previously unattainable source of vast gas supplies that has been unlocked by new hightech horizontal drilling advancements – is not the holy grail it's been cracked up to be. Not even close.
70 % of all electricity in Texas is generated from natural gas
“Everyone thinks [shale gas] is going to solve all of our problems. There are very optimistic estimates about the economically recoverable volumes of gas from this new resource,” he said in an interview last week in the Toronto offices of boutique fund manager Middlefield Capital
Corp., where he's a long-time consultant and is special adviser to the nine-month-old Middlefield Groppe Tactical Energy mutual fund. “That's dominating everyone's views about the gas supply picture – that we're going to be flooded with gas.” The reality, he argues,
is that shale gas deposits are a tiny part of the North American production pool – and they are already depleting fast. Mr. Groppe says that while the average depletion rate in conventional gas wells is about 25 per cent (in other words, if you didn't drill at all for
HNG’s Houston Energy News
Page 2
new wells, production would decline by a quarter each year), shale gas shows even more rapid depletion – output tumbles, on average, 45 per cent in the first year for shale wells. Drilling of shale plays has recovered rapidly from the slowdown during the recession – indeed, the count of active horizontal drill rigs in the United States has ramped up to record levels – which, because of the high initial production volumes
EIA Chart
that are characteristic of shale wells, has flooded the market with supplies and fuelled expectations of continued rapid growth. But given Mr. Groppe's depletion numbers, the high drilling pace may also be serving to drain the resource in the major shale pools even faster than they would otherwise. As for the shorter-term supply picture, Mr. Groppe notes that for all that horizontal drilling frenzy, shale gas accounts for just 6 per cent
of U.S. natural gas production. In the other 94 per cent – conventional gas – the rig count is 70 per cent below the pre-financialcrisis levels of September, 2008, as low prices and high inventory levels have convinced producers to keep drills idled. “With that extraordinary drop in drilling, the [production] decline rate from all these [nonshale] sources is accelerating – and will be much more than offset whatever increases you get in
“ With Gas selling at 30— 40% below replacement cost—How long can it continue? “
shale.” Add to that the fact that consumption continues to grow as the economy recovers, and he believes the glut in gas will prove strikingly short-lived. “We think that we're now having a continuous, rapid decline of gas in storage,” he says. “By summer, it could get to be alarming.” “We would expect gas prices to get above $8 in
the August-September range.” Why should we believe Henry Groppe? Well, he has a habit of disagreeing with the consensus view – and being right. In 1980, when oil approached $40 a barrel and forecasters predicted $100 oil was inevitable, Mr. Groppe said crude would fall below $15 by the mid-1980s. It did. In 1998, when crude
dipped to barely above $10 and some prognosticators were hailing a new era of cheap energy, Mr. Groppe said oil was set to soar. By early 2000, it had topped $30 a barrel. And two years ago, when it threatened to reach $150 a barrel and forecasters said $200 and more were just over the horizon, Mr. Groppe predicted we'd be back at $60-$70 in the second
Caption describing picture or graphic.
half of the year. By October, he was right again. Now, he says, a slow-but -gradual decline in North American natural gas reserves – regardless of shale – means an average price in the $8 range is inevitable to trigger the “demand destruction” necessary to keep the supply-demand picture in balance. Eventually, he says, that price will creep up toward $10 by the
end of the decade, as gas production slowly depletes. Mr. Groppe credits his successes on a meticulous study of supply-anddemand details – something, he says, many of the people who disagree with him fail to do. He believes this is again the case in his critics' misplaced faith that shale plays will permanently alter the trajectory of
North American natural gas supplies. “When you take apart all the pieces from the bottom, there's absolutely no way for that to take place,” he says. “We don't think any of them have done a detailed dissection of what's going on.”
Volume 1, Issue 1
Page 3
The Statistics Support Groppe’s Assumptions
Looking at the charts on page s2 and 3, the changes outlined in Groppe’s assertions seem to be accurate. Those of us familiar with the gas industry and the drilling cycles understand that the macro fundamentals do not change over time. The real question of gas depletion, is not if, but when. Most shale drilling is now occurring due to large commitments during the leasing frenzy of the last few years coupled with hedging strategies to make these programs economic. When those programs and the attendant commitments are gone and fulfilled, it is anybodies guess what the timing will be, but not the direction of pricing. The key to natural gas pricing has always been deliverability, not the amount of calculated reserves in the ground. As Groppe notes: “ We
think that we're now having a continuous, rapid decline of gas in storage. By summer, it could get to be alarming.”
The size of the average well has continually dropped since 1970
“Natural gas. Greatly undervalued in terms of fundamentals. Peaked in the US 40 years ago and will inexorably decline long-term. Increasing use and current prices would create 8 billion foot a day and gas prices would have to almost double. Recent shale gas diversion is only about 13% of total gas supply and of that, 60% is Barnett shale that peaked a year ago and is in significant decline”.
Inside Story Headline
For Questions Contact: Bill Thomas, President and C.E.O.
HNG Energy, L.L.C. 2500 West Loop South Suite 200 Houston, TX 77027 Phone: 713.623.5128 Fax: 713.583.4466 E-mail: [email protected]
“Business Solutions for Texas Energy Markets”
Comprised of unique backgrounds in Energy and financial services, the principals of Houston Natural Gas and HNG Energy Companies (HNG) have determined that a new process for energy marketing and related services is needed for energy retailers and consumers in the Texas Energy Market. Our management team combines the experiences of executives and an advisory board with extensive backgrounds and over 100 years combined experience in managing and developing successful businesses within the Energy industry.
Volume 1, Issue 1 June 23, 2010
A CONTRARIAN MAKES ANOTHER CALL – THIS TIME, NATURAL GAS
Special points of interest:
U. S.Natural Gas Production to decrease Canadian Natural Gas Production and imports to decline Month to Month production declines expected to begin in the 2nd Qtr 2010 EIA to use data from lat 6-18 mos instead of last 2-7 yrs to estimate production 50% of all gas production from wells drilled in last 3 yrs— 1/3 from wells drilled in previous yr Shale gas only 6% of national production, despite accelerated drilling
Long & Littell – doesn't buy the prevailing wisdom that New York Mercantile Exchange natural gas prices are dead in the water, stuck around $4 to $5
A CONTRARIAN MAKES ANOTHER CALL – THIS TIME, NATURAL GAS
Henry Groppe was a lonely voice when he forecast the right oil price. He’s now going against the grain on another fuel, David Parkinson writes
Mr. Groppe – the octogenarian patriarch of Texas petroleum industry analysts Groppe
(U.S.) per million British thermal units even as demand recovers, awash in supplies and with much more on the way.
No, his analysis (and more than 50 years of experience) tells him that gas inventories are about to get a lot tighter, that new supplies are overstated, and that prices are headed north of $8 by the end of summer. Why is he so sure he's got it right and most everyone else has it wrong? Because, he contends, shale gas – the previously unattainable source of vast gas supplies that has been unlocked by new hightech horizontal drilling advancements – is not the holy grail it's been cracked up to be. Not even close.
70 % of all electricity in Texas is generated from natural gas
“Everyone thinks [shale gas] is going to solve all of our problems. There are very optimistic estimates about the economically recoverable volumes of gas from this new resource,” he said in an interview last week in the Toronto offices of boutique fund manager Middlefield Capital
Corp., where he's a long-time consultant and is special adviser to the nine-month-old Middlefield Groppe Tactical Energy mutual fund. “That's dominating everyone's views about the gas supply picture – that we're going to be flooded with gas.” The reality, he argues,
is that shale gas deposits are a tiny part of the North American production pool – and they are already depleting fast. Mr. Groppe says that while the average depletion rate in conventional gas wells is about 25 per cent (in other words, if you didn't drill at all for
HNG’s Houston Energy News
Page 2
new wells, production would decline by a quarter each year), shale gas shows even more rapid depletion – output tumbles, on average, 45 per cent in the first year for shale wells. Drilling of shale plays has recovered rapidly from the slowdown during the recession – indeed, the count of active horizontal drill rigs in the United States has ramped up to record levels – which, because of the high initial production volumes
EIA Chart
that are characteristic of shale wells, has flooded the market with supplies and fuelled expectations of continued rapid growth. But given Mr. Groppe's depletion numbers, the high drilling pace may also be serving to drain the resource in the major shale pools even faster than they would otherwise. As for the shorter-term supply picture, Mr. Groppe notes that for all that horizontal drilling frenzy, shale gas accounts for just 6 per cent
of U.S. natural gas production. In the other 94 per cent – conventional gas – the rig count is 70 per cent below the pre-financialcrisis levels of September, 2008, as low prices and high inventory levels have convinced producers to keep drills idled. “With that extraordinary drop in drilling, the [production] decline rate from all these [nonshale] sources is accelerating – and will be much more than offset whatever increases you get in
“ With Gas selling at 30— 40% below replacement cost—How long can it continue? “
shale.” Add to that the fact that consumption continues to grow as the economy recovers, and he believes the glut in gas will prove strikingly short-lived. “We think that we're now having a continuous, rapid decline of gas in storage,” he says. “By summer, it could get to be alarming.” “We would expect gas prices to get above $8 in
the August-September range.” Why should we believe Henry Groppe? Well, he has a habit of disagreeing with the consensus view – and being right. In 1980, when oil approached $40 a barrel and forecasters predicted $100 oil was inevitable, Mr. Groppe said crude would fall below $15 by the mid-1980s. It did. In 1998, when crude
dipped to barely above $10 and some prognosticators were hailing a new era of cheap energy, Mr. Groppe said oil was set to soar. By early 2000, it had topped $30 a barrel. And two years ago, when it threatened to reach $150 a barrel and forecasters said $200 and more were just over the horizon, Mr. Groppe predicted we'd be back at $60-$70 in the second
Caption describing picture or graphic.
half of the year. By October, he was right again. Now, he says, a slow-but -gradual decline in North American natural gas reserves – regardless of shale – means an average price in the $8 range is inevitable to trigger the “demand destruction” necessary to keep the supply-demand picture in balance. Eventually, he says, that price will creep up toward $10 by the
end of the decade, as gas production slowly depletes. Mr. Groppe credits his successes on a meticulous study of supply-anddemand details – something, he says, many of the people who disagree with him fail to do. He believes this is again the case in his critics' misplaced faith that shale plays will permanently alter the trajectory of
North American natural gas supplies. “When you take apart all the pieces from the bottom, there's absolutely no way for that to take place,” he says. “We don't think any of them have done a detailed dissection of what's going on.”
Volume 1, Issue 1
Page 3
The Statistics Support Groppe’s Assumptions
Looking at the charts on page s2 and 3, the changes outlined in Groppe’s assertions seem to be accurate. Those of us familiar with the gas industry and the drilling cycles understand that the macro fundamentals do not change over time. The real question of gas depletion, is not if, but when. Most shale drilling is now occurring due to large commitments during the leasing frenzy of the last few years coupled with hedging strategies to make these programs economic. When those programs and the attendant commitments are gone and fulfilled, it is anybodies guess what the timing will be, but not the direction of pricing. The key to natural gas pricing has always been deliverability, not the amount of calculated reserves in the ground. As Groppe notes: “ We
think that we're now having a continuous, rapid decline of gas in storage. By summer, it could get to be alarming.”
The size of the average well has continually dropped since 1970
“Natural gas. Greatly undervalued in terms of fundamentals. Peaked in the US 40 years ago and will inexorably decline long-term. Increasing use and current prices would create 8 billion foot a day and gas prices would have to almost double. Recent shale gas diversion is only about 13% of total gas supply and of that, 60% is Barnett shale that peaked a year ago and is in significant decline”.
Inside Story Headline
For Questions Contact: Bill Thomas, President and C.E.O.
HNG Energy, L.L.C. 2500 West Loop South Suite 200 Houston, TX 77027 Phone: 713.623.5128 Fax: 713.583.4466 E-mail: [email protected]
“Business Solutions for Texas Energy Markets”
Comprised of unique backgrounds in Energy and financial services, the principals of Houston Natural Gas and HNG Energy Companies (HNG) have determined that a new process for energy marketing and related services is needed for energy retailers and consumers in the Texas Energy Market. Our management team combines the experiences of executives and an advisory board with extensive backgrounds and over 100 years combined experience in managing and developing successful businesses within the Energy industry.
