That’s putting a big squeeze on Northern Colorado’s natural-gas producers and has forced them to cut back on exploration and production while they wait for demand to catch up with supply.
When that might happen is uncertain.
But when it does, Northern Colorado will be poised to benefit, said Katie Jolly, an analyst with energy analytics firm BenTek.
“The gas is still there, and we know how to get it,” she said. “Then we can definitely turn production back on.”
For now, however, it’s a classic supply-and-demand dilemma straight out of Economics 101, said Don McClure, VP of government regulatory affairs at Calgary, Canada-based Encana Corp., one of Northern Colorado’s leading natural-gas players.
And unless production actually declines and demand fails to rise, the price of natural gas, which has been halved over the past two years, could fall further.
Citigroup commodities analyst Anthony Yuen says the price of natural gas – now $2.08 per 1,000 cubic feet – could briefly fall below $1.
“There would be no floor,” he says.
McClure also noted that while there are regional variations at play, Colorado’s gas industry moves very much in sync with the national picture.
“There has been a significant tightening in natural gas prices vs. where we were a year ago,” Jolly said.
Another factor in the sluggish natural-gas market, McClure said, is the amount of natural gas in storage. A year ago, there was 2.4 trillion cub feet in storage in the U.S. Today, that number stands at 2.9 trillion, McClure said.
“Producers are shifting their focus from gas to oil,” McClure said. “There is a correction under way.”
Over the past five years, he said, supplies of natural gas have gone up thanks to horizontal drilling technology that led to higher natural-gas yields. In so-called shale gas plays, drilling technology has increased natural-gas well production by up to six times, McClure said.
Last year, the U.S. produced an average of 63 billion cubic feet of natural gas per day, a 24 percent increase from 2006. Consumption, however, has grown only half as fast.
Supply is plentiful at the moment because temperatures this winter were among the warmest in more than 100 years.
Between November and March, daily natural-gas demand fell 5 percent, on average, from a year earlier, according to Bentek Energy. Yet production grew 8 percent over the same period.
“We haven’t ever seen a situation like this before,” Chris McGill, VP for Policy Analysis at the American Gas Association, an industry group, told the Associated Press.
At the end of winter, there is usually about 1.5 trillion cubic feet of gas in storage. Today there is 2.5 trillion cubic feet because utilities withdrew far less than usual this past winter.
While producers aren’t happy at the moment, their commercial customers are taking advantage of the low prices, including companies in the chemicals, plastics and fertilizer business. Cities running garbage trucks, buses and delivery vehicles are using more natural gas. Also, electric utilities are switching to natural gas from coal.
Gas production companies are responding to the downward price pressure and increase in supply by cutting back on the number of rigs devoted to natural gas, McClure said.
Nationally, natural gas rig counts declined from 909 in January 2011 to 790 in January 2012. By early spring, that figure had declined to 670. In Colorado, natural gas rig counts declined from 57 in January 2011 to 48 in January 2012, according to Colorado Oil and Gas Association information. Last month, the count stood at 47.
Looking at the oil side of the equation, rig counts increased nationally from 793 in January 2011 to 1,208 in January 2012. For March, the figure is at 1,258. In Colorado, the oil rig count went from seven in January 2011 to 23 in January 2012.
“This resurgence in oil has been phenomenal,” McClure said.
The flip side is that gas producers need to cut back production sharply to bring prices back up to sustainable levels.
Right now, he said, gas is trading at below break-even prices. According to information from investment bank Barclay’s, the natural gas rig count will need to drop to below 500 in order for gas to start trading at $4. McClure, however, feels gas needs to be above $5 for production to come back in a meaningful way.
Many industry experts expect gas to approach the $4 range in 2013. Right now, traders are selling gas scheduled for 2014 delivery right at $4.
Jolly said it might take until 2017 for natural gas supply and demand trends to push production back up.
Once that happens, Tisha Schuller, executive director of the Colorado Oil and Gas Association, said Northern Colorado, particularly in the Niobrara area centered around Weld County, may have a bit of an advantage because it is rich in liquid natural gases such as butane and propane, which enjoy higher prices. Niobrara is about 70 percent liquid natural gases, she said.
BenTek’s Jolly also expects producers to shift resources toward regions such as the Niobrara that offer liquid natural gas and oil. In its fiscal 2011 earnings release, Encana stated that it’s shifting its investments away from “dry” and toward liquid natural gases.
Looking at Northern Colorado, McClure doesn’t expect the slump in gas prices to drastically cut into jobs, primarily because rig crews, which can run from 40 to 100 people, tend to stay with a rig whether it’s pumping natural gas or oil. He does, however, expect to see some support jobs lost in Colorado’s natural gas fields.
Regardless of what happens this year, or next, Northern Colorado’s natural gas isn’t going anywhere. It’s just waiting for the market to swing.
While owning a building seems like something every successful business should do, that’s not always the case. For many companies, it makes more sense to continue leasing space, freeing up time and capital that can be better utilized in other ways.