We were inundated by copies of articles from the Canadian press about an interview with Henry Groppi, the 80-year old head of Texas petroleum reservoir firm Groppi Long & Littell, in which he argued that natural gas prices will more than double from current levels within the next 120 days. Long known as an accurate seer of the petroleum industry, with a track record to support that claim, the initial reaction of many industry participants was: What is this man thinking?
His thesis is perfectly logical - the only question is does the timing make sense?
His thesis is perfectly logical – the only question is does the timing make sense? In Mr. Groppi's view, swelling gas inventories are about to reverse at the same time new supplies – those gas shale plays everyone is so gaga over – are overstated. In his view, the market, as reflected by $4 per Mcf spot prices, is totally wrong and we will see prices north of $8 per Mcf before the end of summer.
Mr. Groppi points out that the average depletion rate in conventional gas wells is about 25% each year, while for gas shale wells it is 45% or more. (Mr. Groppi may be generous in his estimate of gas shale well depletion rates as many wells are showing 80+% first year declines.) In his view, the rapid pace of gas shale drilling is doing little more than draining those reserves much faster than they would otherwise. He noted that gas shale production accounts for just 6% of U.S. natural gas production. The other 94% - conventional gas – has experienced a 70% decline in drilling since immediately before the financial crisis dawned in September 2008. He went on to say, "With that extraordinary drop in drilling, the decline rate from all these [conventional] sources is accelerating – and will much more than offset whatever increases you get in shale."
"Has Technology Made the Gas Bubble Permanent?"
To get to Mr. Groppi's $8 per Mcf target, supply will have to fall short of demand. That is the threshold price at which he sees "demand destruction" beginning for natural gas, something he believes will need to occur to keep the supply-demand picture in balance.
Eventually he expects gas prices to creep up toward $10 per Mcf as gas production slowly depletes. Obviously Mr. Groppi doesn't believe we need Boone Pickens's compressed natural gas vehicle program as a part of our national energy program. As for the revolutionary impact of gas shales changing the trajectory of North American natural gas supplies, he thinks the facts don't support that view. "When you take apart all the pieces from the bottom, there's absolutely no way for that to take place. We don't think any of them have done a detailed dissection of what's going on."
We were reminded of a time in the past when gas supplies were overwhelming demand and driving gas prices down to the $1 per Mcf level. The Gulf of Mexico was declared to be the "Dead Sea" as low gas prices killed offshore drilling. We dug out of our files a report presented by David Herasimchuk of Global Marine, a leading offshore drilling contractor, at the fall meeting of the National Association of Petroleum Investment Analysts (NAPIA) entitled "Has Technology Made the Gas Bubble Permanent?" It seems the title of this report, presented nearly 15 years ago, may be appropriate today in regards to gas shales and their impact on the energy industry.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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