Photo by Energy Tomorrow

There’s no secret about the future of the US natural gas business. It’s all about “demand, demand, demand.” Those were the concluding remarks of Porter Bennett, the CEO of Bentek Energy, at his company’s “Benposium” a three-day conference on the US natural gas business that wrapped up last Thursday at the Houstonian Hotel.

The conference, the first for the company, was a top-drawer affair with an excellent group of speakers who talked about the many challenges facing the natural gas business. And make no mistake, challenges abound. The main one, of course, is the sagging economy, which has further dampened US natural gas demand. Add in plummeting domestic drilling rig counts, the possibility of increased inflows of LNG from new liquefaction plants that are coming on stream in Indonesia, Yemen, Russia, and Qatar, (the combined total output from those plants is 4.5 billion cubic feet per day) which could further undermine US gas prices, and the worries only increase. Oh, and one more worry: thanks to the revolution in shale gas drilling and completion techniques, the US now likely has a century’s worth of gas available – without having to even think about imports.

The key to the future of the US market is unconventional gas – a segment that includes tight gas, coal bed methane and shale gas. Of those three, shale is undoubtedly the most important. In April, the Department of Energy released a report which looked at seven shale basins: the Barnett in Texas, Marcellus in Pennsylvania, Haynesville in Louisiana, Woodford in Oklahoma, the Fayetteville in Arkansas, Antrim in Michigan, and New Albany in Illinois. The conclusion: the gas resources in those total some 649.2 trillion cubic feet (pdf). That’s the energy equivalent of 118.3 billion barrels of oil, or slightly more than the proved oil reserves of Iraq.

To be clear, there is no way that all of that gas will be recovered. Much of that shale gas will be too deep, or too far from pipelines, or will have an obstacle (or obstacles) that will prevent it from being profitably developed. But even with that caveat, it’s abundantly clear that the U.S. has enormous quantities of natural gas -- more gas than was ever thought possible. And that abundance of gas has resulted in huge production increases. In 2008, total U.S. natural gas production exceeded 26 Tcf – the highest level ever recorded.

The revolution in the shale gas sector led William Coates, the president of oilfield giant Schlumberger’s North American operations, to deliver one of Thursday’s most memorable quotes: “We missed the shale play by such a wide mark, I’m just wondering what we’re wrong about this time.” Coates said that no one at Schlumberger, or anywhere else for that matter, could have predicted the huge effect that horizontal drilling and multi-stage fracking would have on the industry. And it’s those breakthroughs that have radically reshaped the natural gas industry, from one where companies drilled a few wells in a given location in an effort to recover relatively small pockets of gas, to a situation where “resource plays” and the “gas factory” have become accepted industry lingo. In fact, Calgary-based EnCana, the biggest gas producer in North America, has begun referring to their shale strategy in the Haynesville as the "Gas Factory." (pdf)

H.G. “Buddy” Kleemeier, the president and CEO of Tulsa-based Kaiser-Francis Oil Company, who appeared on the same panel as Coates, said that when he started in the oil and gas industry 43 years ago, the reserve-to-production ratio in the gas business was about 9 years. And just a few years ago, the industry still had an r/p ratio of about 9 years. Today, said Kleemeier, “The best hope for this business is that we can now realistically talk about a 100-year supply of gas right here at home.”

Some of the more intriguing ideas about the future of the gas market came during the lunch speech delivered by Vince Kaminski, a professor at the Jones School of Management at Rice University. Kaminski (full disclosure, he’s a friend of mine) was the head quant at Enron. And he was one of the few Enron employees who dared to publicly challenge Ken Lay back in 2001 during the tumultuous weeks before the company collapsed into bankruptcy. At Benposium, Kaminski focused on the increasing sophistication of gas trading and how the trading business has evolved over the past two decades. As the gas business has become more information oriented – Bentek collects pipeline throughput data from thousands of locations around the country and sells that data to subscribers – Kaminski believes that investment banks and traders could eventually employ sophisticated algorithms that crunch Bentek or other pipeline capacity data and then use it to trade natural gas around the country. “There will be a trend toward automation in the process,” Kaminski told me after his speech. This automation could eventually become akin to the program trading that investment banks and other traders use to trade stocks. That could lead to more volatility in the gas market over the short term, but over the long term, that volatility could be reduced as more traders get into the game.

The diffusion of information technology in the US pipeline network – and the trading opportunities that come with it – could also affect how the owners of natural gas wells manage their production. Kaminski foresees a time when owners of long-lived gas wells (like those in shale plays) could “become an extension of storage.” In other words, depending on market prices, owners could shut in their shale gas wells for a period of time and then release the gas when prices are more favorable.

While Kaminski’s ideas provide food for thought, the overriding concern among most of the attendees was about prices. The consensus from Thursday’s discussions: prices at $4 per thousand cubic feet were simply not sustainable. At that level, only a few players in a few basins – the Haynesville Shale and Marcellus Shale were the ones most frequently cited – will be able to make money. The sustainable price level for US gas, most agreed, was $6 to $8 per mcf.

A few other notes from the conference:

-Andrew Bradford, an analyst at Bentek, said that gas production at Russian giant Gazprom fell by 35% in May 2009 compared with May 2008. That’s a drop of 14 billion cubic feet per day. That huge drop likely bodes ill both for Gazprom’s customers in Russia and in Europe.

-Bradford also said that LNG demand had plummeted in several key markets: Japan was down 8%, Spain was down 7% and South Korea was down 19%. That could mean that the new LNG capacity coming online will have nowhere to go – except, perhaps, to the US.

-A repeal of intangible drilling costs, a move favored by President Barack Obama in his budget proposal, would reduce capital availability in the US drilling market by 20 to 30%. Bennett said that cutting the IDCs would devastate the drilling business and would be “pretty foolish because it will mean that people won’t have enough gas to heat their homes.”

-How many drilling rigs does the US need to keep production flat? Bennett wasn’t sure, but he believes the number now deployed – about 900 -- is probably about right.

-Regarding shale beds, Coates of Schlumberger said “We still don’t understand why they produce the way they do.”

While the overall mood at the Benposium was upbeat, the news headlines are providing additional reasons for the gas producers to be concerned. And it’s not just about the economy. Congress may soon consider regulations that could put hydraulic fracturing under federal regulation. Such regulation wouldn’t end the use fracking, but it would mean another layer of regulation for the gas industry – a sector which, after decades of worrying about having enough supply, is suddenly awash in gas. And given that surfeit of gas, the only real worry is “demand, demand, demand.”