CERA: High Rig Costs, Tight Labor Markets to Support Gas Prices

HOUSTON Feb.19, 2007 (Dow Jones Newswires)

Rising rig costs and a tight pool of qualified labor are likely to support natural gas prices over the next two years, according to Michael Zenker, head of global gas for Cambridge Energy Research Associates.

"Rig rates climbed 30% per year in 2003, 2004 and 2005," Zenker said in an interview at CERA's annual energy conference here.

Zenker predicts an average Henry Hub spot price, the benchmark off which U.S. domestic gas prices are priced, of $6.56 a million British thermal units in 2007 and $6.32 MMBtu in 2008 as imports of liquefied natural gas increase. These prices were derived, in part, from an average price of $6.83 per thousand cubic feet in 2005 that Zenker said he calculated by figuring out the production costs and returns of about 48,000 wells.

Higher gas prices have enabled companies to drill marginal gas wells, Zenker said, something which has been especially important as the U.S. saw a record number of wells drilled while production remained flat.

Though natural gas futures prices are well off their record highs over $15/MMBtu in December 2005 - settling 5.1 cents higher at $7.292 a million British thermal units Thursday on the New York Mercantile Exchange - they're well above lows between $3 and $4 in 2002.

It's not only high drilling costs keeping gas prices inflated. A lack of trained engineers to run large gas projects that cool gas and turn it into a liquid to be shipped to overseas markets is adding to tight gas supplies, Zenker said.

"What you're seeing is an underperformance of liquefaction projects," he said. Indonesian projects have had problems in this area and still are unable to deliver their contacted supplies.

The capacity to receive LNG in the U.S. is "well above available supply for the next several years," he said. Even with supply disruptions, Zenker said the world should expect to see a 55% growth in supply by 2012 and a doubling of that amount by 2016.

With such a large flow of gas set to enter the market as projects in Nigeria and Trinidad and Tobago come onstream, Zenker said industry debate is centering around whether more gas will allow the market to replace long term contracts with spot cargoes seen as opening the door to a more fluid market.

In addition, Iran as the second largest holder of gas reserves in the world will play a critical role in how much gas the U.S. receives, even if it never directly sends gas to the U.S., Zenker said. What will matter is how much gas it sends to places like India and how much residual supply is then left for the U.S.

Royal Dutch Shell PLC (RDSB.LN) and Total SA (TOT) each have interests in developing the South Pars gas field, the world's largest.

Industry watchers are also eagerly awaiting any sign of OAO Gazprom moving to form a gas cartel with Algeria and Qatar, Europe's third largest supplier and the nation with the third largest gas reserves respectively.

But Zenker said at this point such an idea doesn't make economic sense. "Cartels are usually formed during periods of low prices and oversupply," he said. "What would you get in a cartel now?"

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