Natural Gas Update 2012

By Vernon Trollinger, January 16, 2012, News, Save Money

The past three months has been sort of crazy in the upper reaches of the markets that help shape Texas energy rates. Particularly since natural gas generates nearly half of Texas electricity, the cost of the blue flame directly effects your electricity rates. And the past months has been very active.

Where to begin? Well, the big development was Chesapeake Energy’s announcement that the Utica Shale (which underies the Marcellus Shale by several thousand feet) has significantly more reserves. The Ohio Department of Natural Resources estimates a “potential between 1.3 and 5.5 billion barrels of oil and between 3.8 and 15.7 trillion cubic feet of natural gas.

The reason this formation is being developed in Ohio is that both the Marcellus and the Utica angle upperwards west of the Appalachian Mountains. this makes them shallower than in north central Pennsylvania and thus easier to drill into.

So, you’d think that maybe natural gas drilling and production companies would slow down production when this was announced to keep the commodity price up. Not yet, at least. Chesapeake had been snapping up 1.5 million acres for drilling leases in Ohio for as much as $2,500/acre. The US energy Information Administration stated in its weekly natural gas report (Jan. 4, 2012) that 809 natural gas rigs were in operation during the week of December 29, 2011. Of these, Chesepeake has drilled 9 Utica wells with 3 rigs in operation. Six more are plan to fire up later this year.

Also, this winter’s weather has been mild for much of the country. The EIA explained in its January 11 Natural Gas update:
“Temperatures during the week ending January 5 were 6.4 degrees warmer than the 30-year normal temperature and 4.6 degrees warmer than the same period last year.his continues the trend seen over the last 8 weeks of warmer-than-normal temperatures at the national level.”

In short, with the mercury in mid-50s and even the 60s in parts of the Midwest and Plains, very little natural gas was being burned for heat over the past few weeks.

Natural gas prices have been declining since July, 2011 when the high peaked near $5.00/MMbtu. Natural gas in storage (both in tanks and moving through pipelines) are at all time highs. According to the EIA’s January 5 report, “Inventories at the end of the year were at their highest levels for that week since EIA began tracking storage levels.”

As Dave Pursell of Tudor, Pickering, Holt & Co. Securities Inc was quoted in the Oil and Gas Investor Blog in 2010, “This industry is drunk on shale liquor…”

It’s looking like 2010 all over again…

On January 12, 2012, the NYMEX price for February delivery natural gas was $2.70/MMbtu —and the Henery Hub spot price dropped 14 cents closing at $2.67. The trend hints that it could go lower. How much? On Friday, September 4, 2009 just before the long Labor Day weekend, the Henry Hub spot price closed at $1.84 per MMBtu, the lowest level since December 6, 2001. Spot prices in New York closed that day at $2.04, and the low settlement was $2.84 for the Oct 2009 contract.

Of course, this is very interesting on the heels of two new items:

  1. The Dec. 30, 2011 suspension of EPA rules changes by the U.S. Appeals Court for the District of Columbia Circuit in Washington, D.C.  EPA’s Cross-State Air Pollution Rule were about to shut down Luminant’s Monticello facility, a coal burning 1,200 megawatt power plant. Luminant announced that it will not close Monticello, saying, “The company intends to continue closely evaluating business and operational decisions given that this stay does not invalidate the rule, but delays a decision on its implementation until a final court ruling is issued.”
  2. The report of a 4.0 earthquake in Ohio  tied to spent fracking fluid injected into deep rock formations. While disposing of fracking fluid in this way has been suspended in the Ohio plays, fracking has not. Production throughout the all shale plays is continuing.

With the EPA rules suspended barring an April hearing, it appears ERCOT’s reliability problems it feared for the summer have faded, possibly taking with them the threat of rolling black-outs. Natural gas might not need to feed the energy demand that ERCOT feared. Plus, if there’s been any ripples or concerns about solving the problems of spent fracking fluid, they’re not causing big waves in natural gas prices. This week (January 12), the EIA is forecasting the average 2012 Henry Hub spot price for 2012 to be $3.53 (down about $1 from last year’s prediction of $4.50) but rising to $4.14 in 2013…assuming  weather, production, and demand “normalize”.

So, what’s the take away for electricity in Texas? Energy consumers have two options. They can lock in a fixed rate plan between now and late April before the summer cooling season fires up. Or, they can choose a variable month-to-month plan to take a gamble that natural gas prices will continue to decline and take electric rates with them.

It might be crazy in the gas industry just now but either way, now is the time to look for low energy rates!

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