Natural gas faces two-year squeeze

By Shaun Polczer
Calgary Herald
March 28, 2009

ConocoPhillips predicts prices will languish

Kevin Meyers, President Of ConocoPhillips Canada (Photograph by: Ted Jacob, Calgary Herald, Calgary Herald)

Speaking to reporters at the company's downtown head-quarters, Kevin Meyers said he doesn't see a meaningful recovery for natural gas--and expects the possibility of even lower prices--for at least 18 to 24 months.

Although costs for drilling and services have fallen as much as 20 per cent, gas prices have fallen farther and faster, shedding about three-quarters of their value since summer.

"The cost environment will adjust slowly," Meyers said. "But until the gas bubble comes down, you're going to see even lower prices."

Meyers' comments came as gas futures in plunged 32 cents, or more than 10 per cent, in New York on Friday to $3.63 US per million British thermal units--down almost 20 per cent in one week and the lowest level since September 2002. By contrast, they were near $10 at this time last year.

Falling prices have prompted several producers to cut capital spending and shut in drilling rigs.

While Canadian drilling activity is being curtailed ahead of the annual spring thaw, Baker Hughes reported Friday that the U. S. rig count fell to the lowest level since 2003.

Joining other big producers like EnCana Corp. and Canadian Natural Resources, Conoco will slash 35 to 40 per cent from its natural gas budget this year, Meyers said.

The company expects to spend about $900 million in 2009 to develop its gas prospects, which include positions in the Montney and Horn River basins in northeast British Columbia.

Conoco is one of the country's largest natural gas players after successive acquisitions of Gulf Canada in 2002 and Burlington Resources in 2006. It produced a little more than one billion cubic feet (bcf) a day in 2008, about seven per cent of Canadian output.

Analysts said prices could fall further as North American inventories approach record levels. The U. S. government's Energy Information Agency(EIA) on Thursday recorded a surprise three bcf storage increase last week, marking an early start to the traditional injection season that starts in April.

As of March 20, the EIA said stocks were 372 bcf higher than last year and 280 bcf above the five-year average of 1.37 trillion cubic feet (tcf). At that rate, inventories will brush up against the theoretical 3.8 tcf capacity well before summer, says Gil Dawson, a commodities strategist with SBM Inc. in Calgary.

"We call that hitting the wall," he said.

With no place to store their gas, producers would be forced to shut in wells or sell it for almost nothing. SBM doesn't make price forecasts and instead identifies market trends -- and the trend is toward higher supplies and lower demand.

When the wreckage from the financial crisis and the recession clears, the North American gas market could be oversupplied by as much as five billion cubic feet a day, prompting Dawson to suggest gas prices have a lot further to fall.

"We don't see the bottom yet," he said.

But over the longer term, Conoco's Meyers said the company still thinks gas prices will be high enough to support two major pipelines from Alaska and the Mackenzie Delta.

"We still believe the long-term gas price will sustain an economic project," he said. "It's not about what you think gas prices will be in 2010, it's your view of what they look like in 2020 or 2030 that matters."

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