Mile Stone: natural gas in underground storage, the primary measure of whether gas is in over- or undersupply, has now dropped below the five-year average for the first time since 2011, and is a dizzying 31.6% below the same week last year.
The graph from the EIA shows quantities in storage for the last two years, on a weekly basis. The two bumps are the buildups for the winter. At the end of heating season, storage is at its lowest. Note how the blue line pushed up the upper limit in late 2011 and through much of 2012. That was a fiasco. Note how the blue line at its end on the right (current level) intersects the brown line (5-year average). That’s the mile stone:
It’s officially over, the natural gas “glut” that resulted from a historic drilling bubble!
Yet, the sector isn’t out of the woods. The low price of natural gas claimed GMX, an Oklahoma City oil and gas producer that filed for Chapter 11 bankruptcy protection. The price of natural gas, at around $4 per million Btu, is up from a ten-year low last April of about $1.92, but is still below the cost of production for wells that produce only “dry” gas. And more bloodletting likely to follow.
On that topic, French mega-oil company Total CEO Christophe de Margerie disclosed in a long interview about all sorts of energy-related issues that his company, which is involved in shale gas in Texas and Ohio, had “serious losses” on those acquisitions. An internal study determined that Total’s breakeven point for “dry” natural gas wells is $6/mmBtu. Its wells that also produce gas liquids or oil remain profitable. “The price of energy cannot remain for long under the breakeven point; otherwise production will stop,” he said.
“It’s clear that we will soft-pedal this,” he said. “I don’t see the point of investing there—I want to clarify, in dry gas—where there is no profitability.” So Total stopped production of dry gas and won’t restart until prices rise above the $6/mmBtu breakeven point. Meanwhile, the company will invest in countries where the market is profitable, such as China, Poland, or Denmark, he said.
All producers have their own calculus, but face similar problems—and $6/mmBtu for dry gas is a good marker. Below it, producers will “soft-pedal,” as de Margerie said, production of dry gas and instead focus on liquids. Dry gas is thus reduced to a byproduct. This will generate considerable supply, but over time, as we have already seen, not enough to satisfy rising demand. As gas in storage gets squeezed, the price will rise—and that’s the solution. But breakeven won’t be enough for an industry full of hair-raising risks. The price will likely overshoot by a good margin.