Sheila McNulty Alaska adds to US gas bubble

As if there were not enough gas in the US.

The US Geological Survey has discovered that much of what it thought was oil in the National Petroleum Reserve in Alaska is actually gas. It says in a new report that new estimates are for 896m barrels of conventional, undiscovered oil and 53 trillion cubic feet of conventional, undiscovered, non-associated gas within the reserve and adjacent state waters.

This compares with estimates made in 2002 of 10.6bn barrels of oil. The new estimate, roughly 10 per cent of the 2002 estimate, is due primarily to new data from recent exploration drilling that revealed gas rather than oil in much of the reserve. Nonetheless, the new assessment also indicates 8 trillion cubic feet less gas than the 2002 estimate of 61 trillion cubic feet of undiscovered, conventional, non-associated gas. Non-associated means there is little to no crude oil in the reservoir.

Yet that is still a surfeit of gas and, as such, is just one more reason why the US should take advantage of its broad gas reserves by offering government incentives to build an energy infrastructure to use its gas.

These incentives could come in the form of support for gas-run vehicles or more gas-fired power plants for electric vehicles. Or even incentives for gas producers to move from coal-fired to gas-fired plants. Not only is the fuel clearly abundant in the lower 48 and Alaska, but cleaner than coal.

But the US government has yet to push it, choosing instead to focus support on renewables, such as wind and solar, which still need backup fuels, such as gas, and are a long way from being brought up to scale.

Even some producers are becoming fed up with the lack of demand for gas in the US and turning their attention to oil production.

But…Credit Suisse has highlighted what it calls 11 Bullish Factors for Gas Amid the Gloom in a new report. It explains:

Investor sentiment on natural gas has deteriorated as quickly as the price this year. Front-month prices are down 40 per cent year-to-date and have fallen 14 per cent since early October to ~$3.30 per MMBtu.

The 2011 curve has slipped to just $4.20 per MMBtu while 2012 has slid to $4.97 per MMBtu. Likewise, the long oil versus gas trade keeps working, with gassy E&Ps flat since early October versus a 5% gain for the oily E&Ps.

Year-to-date, the gas-focused names are down 13% versus a 17% gain in the oil-focused names. So amid these seemingly brutal times for gas, we present 11 emerging factors that are logically bullish corrective mechanisms for natural gas markets:

1 ) Producers Starting to Show Some Restraint

2 ) Dry Gas Rig Count is Falling

3 ) Hedge Roll Offs

4 ) Drilling to Hold Haynesville Gas Leases is Nearing an End

5 ) Oil Drilling Driving Up Pressure Pumping Costs and Eroding Returns

6 ) Few Plays Break-even at 2011 Curve of ~$4

7 ) Gas-Focused Reinvestment Rates at 185% and 145% for 2010 and 2011

8 ) Drilling Carries Becoming Less Meaningful with Recent Deals Focused on Liquids-Rich Plays

9 ) Diminishing Contango in the Gas Curve Presents Less Desire to Drill

10 ) Ongoing Coal-to-Gas Switching Among U.S. Utilities

11 ) Debt per Proved Reserves Near Cycle Peak

Without significant effort to use more US natural gas domestically or rush to export it, however, others remain pessimistic. A new report by Deloitte says that the fundamentals now could justify a return of the once common phrase – the gas bubble. An extract from the report:

Even when drilling slows in the US, imports of gas in the form of liquefied natural gas will likely put a lid on prices. Countries like Qatar, Australia and Libya have natural gas reserves far exceeding local needs. The push to find export markets for gas now flared in places like Nigeria will further increase the LNG supply.

Trevear Thomas, principal at Deloitte, adds:

When Qatar satisfies the demand in Europe and Asia they could be looking to expand here. If you can get LNG at comparable economics to shale, it will find a place as a component in the gas supply. With growing supplies of natural gas from both unconventional sources and LNG, producers will be pressured to reduce costs and seek new markets to increase demand.

The report concludes:

In many ways it looks like the gas bubble is back, and this time it is global.

The US can use its gas or lose it to exports seeking higher prices elsewhere. The country would benefit most - environmentally, economically and from an energy security standpoint - by using its homegrown gas resources to replace as much imported oil and dirty coal as possible. Why doesn’t the Obama administration see that?