Contributed by Jen Alic, OilPrice.com. The folks at Gazprom are having a good snicker, reveling in the mockery that has been made of a Ukraine-Spain gas deal that would have loosened Russia’s gas grip on Kiev. Everyone wondered how Russia would respond to Ukraine’s attempt at gas independence. This is what happens when you mess with Gazprom.
As Washington hunts ill-defined al-Qaeda groups in the Middle East and Africa, and concerns itself with Iran’s eventual nuclear potential, it has a much more pressing problem at home: Its energy grid is vulnerable to anyone with basic weapons and know-how.
Last week, the German Parliament passed a resolution that asked Chancellor Merkel to needle Russian President Putin about the resurgence of repressive, antidemocratic tendencies in Russia. It did not go unnoticed at the Kremlin. And it paved the way, so to speak, for her trip to Moscow on Friday—to re-cement their “strategic partnership.”
The “shale gas revolution” opened up huge resources in the US, and natural gas production jumped as a consequence, but it pushed prices far below the cost of production, for far too long. A disaster for an entire industry. An amazing opportunity for its customers. Since April, the price has jumped 80%, and it’s still far below the cost of production.
Militants attack oil infrastructure and staff. Oil theft leads to severe pipeline damage, causing loss of production and pollution. There is piracy, sabotage, violence, and decrepit infrastructure. Nigeria is the largest oil producer in Africa and has the ninth largest natural gas reserves in the world. Yet only 50% of the people have access to electricity.
Why would France suddenly prohibit shale gas exploration? Sure, there are environmental issues: flammable drinking water, earth quakes, cows that die, radioactive sludge in sewage treatment plants…. But French governments have had, let’s say, an uneasy relationship with environmentalists. Its spy service DGSE, for example, sank Greenpeace’s flagship, the Rainbow Warrior, in the port of Auckland, New Zealand, killing one person. No, there must have been another reason.
Natural gas may be the most mispriced commodity these days. Its price has been below the cost of production for so long that the industry is suffering serious consequences with billions in losses—dollied up as “non-cash accounting charges.” Leveraged players are trying to keep their chin above water by selling assets. And drilling activity is collapsing. But demand for natural gas by power producers has been booming—and it’s killing coal one powerplant at a time.
It’s been tough for natural gas drillers. Prices crashed. Drilling activity collapsed. Producers are writing down their natural gas assets by the billions. And the bloodletting continues. On the other side, power generators have switched from coal to natural gas, pushing their consumption of it to new highs. A trend started two decades ago with a new technology and the usual suspect, Congress. A toxic brew for coal.
Natural gas traded at $3.22 per million Btu at the Henry Hub on Monday, a seven-month high, and a jump of 69% from its April low. Breathtaking when you think that a few months ago, the doom-and-gloomers, who’d been right for a very long time, were predicting chillingly that the price would hit zero by the fall, when storage would be full and excess production would have to be flared. But the pains for the industry are far from over.
Forecasting the price of natural gas is easy. The US Energy Information Agency does it regularly, and like all seasoned forecasters, it produces a slightly wobbly line trending slightly higher or lower. Based on its latest, we expect smooth sailing, with gently rising prices as is appropriate for the relaxing calm that reigns in the natural gas market. Alas, reality is a series of violent ups and down with sporadic and vicious spikes.