Jump in rig count should be a positive for jobs

In another sign of improving momentum in the US economy, the active oil and gas rig count started rising in recent weeks. This is after a major decline in 2012 and a stagnant 2013.

Source: Baker Hughes

A big part of the drop in 2012 was due to the sharp decline in natural gas prices. Production in certain situations became unprofitable - particularly for some of the more leveraged projects.

Source: barchart

Now that gas prices have firmed up and likely to stay that way (see post), some of the extraction projects make sense again - especially as technology improves. Should conversion from gas to liquids become less expensive (see story), rig count will increase further.

Like it or not, oil and gas jobs tend to be high-paying - which should help with US wage stagnation. The industry also generates a decent job multiplier effect through the various peripheral sectors that support it (housing, manufacturing, transportation, etc.) If sustained, this jump in rig count could therefore provide a meaningful contribution to the US economic expansion.

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Getting around the Keystone pipeline restrictions: pumping oil through gas lines

Early in the year Greg Merrill discussed the current administration's decision to shut down the Keystone pipeline project and the issues surrounding that policy. That was obviously not the end of the story. If there is a need, the energy industry will find a way.

In recent years the various natural gas shale projects have changed the configuration of natural gas delivery in the US. That means some of the traditional routes used to transport natural gas to a number of areas - some over long distances - are no longer economical. And now a number of these gas lines could be modified to transport crude, sometimes in the opposite direction.

JPMorgan: - Given the regulatory challenges facing the construction of some new oil pipelines in North America, many companies are turning to converting existing assets to oil service. With natural gas supplies growing in numerous regions from shale plays such as the Marcellus, gas pipelines delivering along historical routes into these regions are becoming underutilized, providing options for conversion to transport crude oil.

At least four gas lines are under discussion for conversion into oil service that could move oil out of Canada, the US Gulf Coast, and upper Midwest areas. One of the pipes making up TransCanada’s Mainline gas network that runs from western Canada to the eastern border is under consideration for conversion to crude oil, which could reportedly deliver 0.5 to 1.0 mb into Padd 1 and eastern Canadian refineries. Additionally, Energy Transfer Partners has petitioned the US Federal Energy Regulatory Commission to repurpose the Trunkline natural gas line into crude service and reverse the direction to run south from the upper US Midwest into the Gulf Coast. The Pony Express line originating in Wyoming completed an open season for deliveries of approximately 230 kbd of crude into Oklahoma in 3Q2014 after being in gas service since 1997. Lastly, parts of the underutilized El Paso Natural Gas (EPNG) pipeline system are being considered for conversion to transport an estimated 400 kbd of crude to southern California refineries from west Texas.

Here is an example. The Trunkline gas line, developed to deliver natural gas from the Gulf Coast to the Midwest is no longer economical because these customers (in most cases) can get gas from nearby shale sources.

Panhandle Energy: - Trunkline Gas Company operates a 3,059-mile pipeline system with access to Gulf Coast supply sources which can deliver 1.5 Bcf/d of natural gas to Midwest and East Coast markets. Our Midwest customer base includes some of the nation's largest utility and industrial gas users in Chicago, Michigan, Memphis and St. Louis.

The line doesn't follow the proposed Keystone path exactly, but it could get crude to the Gulf Coast nevertheless. And that's the idea - just move oil in the opposite direction. Of course just like Keystone, these projects are also going to face a great deal of opposition.

Petroleum News: - Operating in the shadows, Energy Transfer Partners, ETP, is trying to gain an edge over others — notably TransCanada and the partnership of Enbridge and Enterprise Products Partners, EPP — to offer pipeline access from the Bakken, Alberta oil sands and the Utica shale plays to Gulf Coast refineries.

Industry sources say its plan is pinned on reversing its 770-mile Trunkline system to a southbound operation from the Midcontinent, shifting from the declining natural gas business to the shale-rich core of the United States and beyond to Alberta. They are projecting that the switch to a Gulf-bound crude pipeline could expand Trunkline’s capacity to 400,000 barrels per day from 150,000 bpd.
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Although ETP has kept tight-lipped about its plans, the proposal was dragged into the public spotlight through a motion to “intervene and protest” by Michigan Gov. Rick Snyder filed with the Federal Energy Regulatory Commission. Snyder said the proposal to convert a “key piece of the natural gas infrastructure” in Michigan into an oil pipeline “will not serve Michigan’s energy needs” to heat homes and businesses in a large part of the state.

One way or another the industry will find ways to get crude to the Gulf. As it does so, the US job market should benefit - as it did in Canada - with multiple businesses springing up to support these projects.

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Natural gas storage surprise prompted massive short covering

This morning's EIA natural gas in storage report took everyone by surprise. We started out with this projection.

Bloomberg: The U.S. Energy Department’s natural-gas inventory report, scheduled for release at 10:30 a.m. in Washington, will show that supplies rose 2.6 percent last week, according to a survey of Bloomberg users.

The government’s report will show that inventories gained 74 billion cubic feet in the week ended June 8 to 2.951 trillion cubic feet, according to the survey.

At 10:30AM the EIA had this to say: "Working gas in storage was 2,944 Bcf as of Friday, June 8, 2012, according to EIA estimates. This represents a net increase of 67 Bcf from the previous week." This was visibly below the Bloomberg survey.

Working gas in underground storage compared with 5-year range (source EIA)

So what's the big deal? Again, we have a technical issue in the market. The nat gas market has been left for dead with the speculative part of the market piling into the short positions. A surprise in the inventory number sent the shorts covering. And in this market a shot covering is not a couple of percent. Natural gas futures spiked over 12% in a short period of time.

Natural gas active futures contract intraday

It remains to be seen whether this rally will carry over to next week. But this is a good lesson for other markets with overextended short exposures such as oil, euros, etc.

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US coal production declines as the industry faces further stress

Here is a follow-up to the post on the declining US coal demand. As natural gas hits a new low today, the pressure on US coal industry increases further.

Natural gas nearby futures contract (Bloomberg)

The impact is unmistakable. The latest data from EIA is showing 2012 coal production levels materially below the 5-year range for this time of the year.

Making things even worse for the coal industry is the new EPA proposal to reduce carbon emissions by electricity companies. This proposal would turn the new coal-fired power plants into money losing investments.

Reuters: The first-ever U.S. proposal to restrict carbon dioxide emissions would have once been a major shock to electricity companies by making it uneconomic to build new coal-fired power plants.

But the irony is that the essence of the EPA's proposal has effectively already been usurped by low natural gas prices, which also turn coal-fired plants uneconomic.

Reuters: But the discovery of abundant supplies of cheap natural gas means that many of those plants won't get built anyway - making the Obama administration's plan, while painful for the coal industry, much less relevant.

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US natural gas hits another all-time low

The super-early spring in the US is bringing with it two things: terrible allergies due to high pollen count and really low natural gas prices due to too much inventory. Natural gas hit another low today with a 4% drop.

Natural gas futures contract (Bloomberg)

It is important to note that this is a US-specific phenomena. Globally natural gas prices remain elevated and the spread between the US gas price and prices elsewhere has been rising rapidly. "Lake Charles" refers to the Lake Charles terminal (Louisiana pipeline).

Natural gas prices (Source: Barclays Capital)

The only real way to arbitrage this divergence is with Liquefied Natural Gas (LNG) that can be delivered to these offshore locations. And it will be a while before the capability is there to export LNG on any significant scale.

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Natural gas price hits new lows but many US residents are not benefitting

US natural gas continues its decline, as futures are toying with and briefly crossing the psychologically important $3.00/MMBTU support level.  The price collapse has been unprecedented.

Henry Hub natural gas active futures contract (Bloomberg)

Warm weather, ample supply, and limited storage are driving down prices.  The amount of gas in storage is substantially higher than the 5-year range.

Natural gas in storage (billion cubic feet) - source: EIA

One would think that all this abundant cheap natural gas should make it easier for the residential consumers this winter. But apparently that is not the case just yet.  Consumers seem to be paying roughly the same seasonal retail price they have paid in the past and not benefiting from this decline.  Take Illinois for example.  Here is one state that could use a break in gas prices given the poor financial conditions and cold winters.  The chart below shows prices Illinois residents pay for gas vs. the NYMEX futures contract.  Yes, one could argue there should be a basis between the two prices, but why would the spread be increasing that much? The residents actually seem to be paying more than they did the same time last year.

Natural gas Illinois residents pay for gas vs. the NYMEX futures contract (Bloomberg)

Clearly there are a number of intermediaries between the pipeline and an Illinois resident, and they all seem to be making more money.  But nobody seems to be out there "occupying" their local utility.  Perhaps it's time to cap the greed and give an Illinois resident, who is not able to shop in a competitive market, a break on her gas bill.




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A sober look at US natural gas

Looking back at a two year old post on natural gas called "Natural gas prices below zero?", it feels as though we are back to the same price dynamics. Price for the "nearby" Henry Hub contract hit new lows today at $3.317/mmBtu.

What is driving this price collapse? As before it is the usual suspects: limited storage, strong production (particularly in US shale), increasing reserves, and warm weather.  Let's take a quick look at the first three.

1. Storage: The chart below compares current storage usage versus the historical range based on where we in the seasonal cycle (inventory drops off in the winter and increases the rest of the year).  Just as in 2010 and 2009 we are at the top of the range and may go even higher if the weather in the NE & Midwest stays warm.

Source (EIA)

2. Production continues at rates significantly above historical levels. 

Source: EIA

This growth is driven by a rapid increase in shale gas production.  According to EIA, the US shale production increased 14-fold since 2000 and is now 22% of total US production.

Source: EIA

3. And estimated reserves in the US continue to increase.

Source: EIA

It is almost as though the US is becoming the Saudi Arabia of natural gas but with limited export capabilities. No real support for natural gas prices is expected to come until 2013. According to a Goldman report this support will come from moderation in production growth and environmental restrictions that will force conversion from coal burning to natural gas.

Goldman: 2013 shaping up as a transition year to a more balanced market We expect 2013 to be a transition year, with the market’s reliance on priceinduced responses (e.g. need for coal-to-gas substitution) diminishing as US shale gas production growth moderates, economic growth improves and looming increased environmental restrictions – notably, CSAPR Phase 2 and Maximum Achievable Control Technology (MACT) – further boost gas-fired generation at the expense of coal. On net, we expect less priceinduced coal-to-gas switching will be needed than in 2012, allowing prices to move higher, and are introducing a 2013 NYMEX natural gas price forecast of $4.25/mmBtu

Until then if the weather stays warm, there is no telling how low natural prices could drop.

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