Counter Punches

It is easy to bemoan the low price of natural gas and the dampening effect that is having on E&P companies, their common-stock holders and royalty owners in the Haynesville, Fayetteville and so on. As of June 8, the U.S. oil rig count had risen in 20 of the past 21 weeks, per Smith Bits data cited in a Barclays report. The total amount of oil drilling had gone up 62% year-over-year, while the gas rig count hit a 13-year low.

Until we find markets for all that gas the price won’t recover, so we continue to find the topic of gas demand (and possible exports) compelling. Apparently international observers do also, according to two Hart Energy colleagues who attended the 25th annual World Gas Conference in Kuala Lumpur in June. This event is held every three years by the International Gas Union, a group of 110 members representing 95% of the world gas market. They report that the hot topic there was U.S. LNG exports. Every speaker was bombarded with two questions: how much, and when?

The answers will be just as critical to U.S. gas producers as to people in high places in Qatar, Trinidad, Australia and Russia.

More buyers of gas are stepping forward. At press time the latest, Chevron Phillips Chemical Co., broke ground on a new ethylene (l-hexene) plant in Baytown, Texas, to come online in 2014, that will use as its feedstock gas from the Eagle Ford shale. The plant will be the world’s largest, benefiting from cheap natural gas and creating 400 jobs.

But exports are still on the table, even as opponents start to stir. Sen. Ron Wyden of Oregon will be the top-ranking Democrat on the Senate Energy and Natural Resources Committee when the current chairman, New Mexico Sen. Jeff Bingaman, retires in 2013. Rep. Ed Markey of Massachusetts is the ranking Democrat on the House Natural Resources Committee.

Their proposed legislation would ask the Obama Administration to block exports of U.S. oil, natural gas and liquefied natural gas (LNG). Then there is the Sierra Club, which vows to oppose all LNG exports, believing they would only encourage more shale-gas wells to be fractured.

Ironically, in May, ConocoPhillips reactivated LNG exports from the Kenai Peninsula in Alaska after a long dry spell. Until recently, it had planned to mothball its facility altogether. Now it expects to deliver four or five cargoes of Alaskan LNG to Japan this year. By the way, although terminals in the Lower 48 do not yet have full permission to export U.S.-sourced LNG, they already can ship out—and do—foreign-sourced LNG that arrived here to find no demand.

In response to the call for banning exports, several people beg to differ. The author of a new study from the Council on Foreign Relations, Michael Levi, says the U.S. should use potential LNG exports to get concessions from its trading partners. Levi believes open trade should be the rule, and he urges the federal government to facilitate LNG trade and approve applications to export it.

Charles Ebinger, a director of the Brookings Institute’s Energy Security Initiative, released a report recently that found that higher exports of natural gas will not have a major adverse effect on U.S. gas prices. This worry has been circulating among some manufacturers, gas utilities and their customers, and lawmakers.

Meanwhile, on the oil side, Citi’s global energy economist, Ed Morse, told attendees at Oil and Gas Investor’s 5th annual Energy Capital Conference in Houston in June that North America is well on its way to becoming the new Middle East by the end of the decade—barring political hurdles from governments that could slow down the growth in oil output from Canada and the U.S.

A week later, new ConocoPhillips chief executive Ryan Lance delivered the same message to OPEC members and other parties at a conference in Vienna, the day before OPEC met there on June 14. OPEC chose to hold its production quota at 30 million barrels a day, even though it is actually producing closer to 32 million a day. (Total world production is 89- or 90 million a day.)

So, what does the outlook seem to be in Washington, D.C.? Deutsche Bank energy analyst Paul Sankey visited there recently. He says, “Over the past four years, the oil industry has seen its political power go from a 30-year low as Democrats assumed power...to a 30-year high as the election approaches, despite Ma-condo. The drivers of the revolution are clear: the multistate unconventional boom and the jobless rate.”

Low natural gas prices may fuel more A&D transactions this fall, and oily assets still command a lot of attention. We’ll tell you what’s in store at our 11th annual A&D Strategies and Opportunities Conference, to be held at the Ritz-Carlton in Dallas on September 5 and 6. Go to adstrategiesconference.com for all the details. Mark your calendars!