America's natural gas future

I heard this morning that Exxon/Mobile is buying XTO for 31 billion because they want entry into the US Natural Gas market. After a little Googling I found this article on Bloomberg.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSLS5tbhG9xc&pos=1

Basically, Exxon thinks that due to emission regulation coal power plants are going to switch over to natural gas. Currently there is an oversupply of natural gas which cause a huge crash in prices over the summer and even with the winter weather gas prices haven’t rebounded to their historical 10% of oil prices.

I think this is probably a good thing in the long run we have a large amount of gas in the country and if we start using more it should take some of the pressure off of oil prices. The fact that a large player like Exxon not only believes this but is reentering a market that they had completely abandoned show, at least to me, that this could be the start of a long term trend.

So what do you guys think this signals, if anything?

For the most part, natural gas doesn’t replace oil, it replaces coal, so you won’t see much impact on oil prices. Historically, natural gas prices have been far more volatile than coal prices. It may be cheap right now, but that doesn’t mean it will be in a year or so.

Finally, there are a lot more in proven coal reserves than there are in natural gas reserves. The fact that EXxon is getting behind natural gas right now means Exxon thinks there’s money to be made, but for a long-term (like the next 100 years) strategy, I’d pick coal.

Most natural gas is a byproduct of oil production, which is why it’s so cheap-- it’s supply is in large part tied to the extraction of oil, not actual demand. If oil demand (and thus production) went down in any large way, it’s possible that the price of natural gas might go up considerably. Perhaps Exxon sees this as a hedge against sagging oil prices.

This is utterly and completely false. Maybe if you went back 100 years in time, what you are saying would be true. Now, it makes no sense whatsoever. Please explain how all the shale gas in the U.S. is a byproduct of oil production or admit that you have no idea what you are talking about.

Exxon already had bigger reserves of natural gas in the United States than of oil. On a equivalent basis, 54.4% of their 2008 year-end U.S. reserves were natural gas versus 45.6% for oil. For the worldwide operations, Exxon’s reserves were 59.1% oil and 40.9% natural gas. The source is the company’s 12/31/08 10-K.

While natural gas is more of a substitute for coal than oil currently, that doesn’t mean gas can’t replace a big portion of oil use as well. Gas can be used as a transportation fuel with CNG. Plus all of the use of heating oil could be replaced with gas.

Gas is a far cleaner fuel than coal, so there will probably be a bias towards it. Further, while the reserves of coal in the U.S. are bigger than gas, I don’t believe that is the case worldwide. Finally, U.S. reserves of natural gas keep climbing as new technologies arise.

I was thinking about some of the recent talk about natural gas uses to power vehicles but you’re right on some further research that is about the only overlap between oil and gas uses since the minority of oil goes into heat and electricity. From what I can find on Wikipedia there is about 1092 BBOE of coal proved in the US and about 45 BBOE of natural gas so there really isn’t a way to replace coal with natural gas.

I have to wonder about some of the P2/P3 reserves for natural gas because the FD costs are decreasing rapidly while horizontal drilling and production technology is allowing larger for larger total recovery numbers. I don’t know about mining technology but from the few friends I have over there it doesn’t seem that there is much in the way of increasing production technology so it’s possible that P2/P3 reserves for gas will increase fast enough for gas to pass coal in the future.

Obviously Exxon thinks there’s money to be made but typically if there is money to be made then other companies are going to try to make it as well which could lead to them trying to increase natural gas consumption to increase their profits.

It’s already been covered above but there is almost no relation between natural gas production and oil production to the point where basins are classified by production into oil and natural gas.

It’s worth thinking about Devon’s recent announcement that they will be focusing on North American activities going forward. Link

I have a (very) minor share in an XTO natural gas well, and as a result, I get a small amount of money per month from that share. Anyone have a clue as to how this will affect my check, other than potentially putting a different name in the “from” address?

Your number for gas is off. The Potential Gas Committee puts the supply of U.S. gas reserves at 2,074 TCF as of 2008, which would equate to 346 BBOE. It’s also worth pointing out that there was a 35% increase from 2006 to 2008. I would expect that we’ll continue to see large increases as more becomes known about these shale plays.

You will receive 0.7098 shares of XOM stock for every 1 share of XTO stock that you own. Also, your XTO stock is up about 15% today, so you could always take the gain and sell.

Natural gas certainly has a place in America’s current and future energy needs, but it’s more of a supplement than a replacement for other fuels. It’s more expensive than coal on a per-energy basis, so it’ll probably never form the backbone of our power generation the way coal does now, but it has other advantages, most notably that it produces less CO[sub]2[/sub], and that a gas boiler can be brought on or off line quicker than a coal one, so gas generators are better for responding to fluctuations in demand.

The real money’s in the accessories.

I think it signals Exxon are expecting a sustained pick up soon in gas prices. Gas drilling has been in the doldrums for a good year now and it will not take much of a sustained cold snap to draw down storage. With the lack of new gas wells coming on line and the usual rate of gas wells falling over , there could be a supply crunch until rigs get back drilling to fill in the supply hole.
There has been some discussion that the suppressed gas prices are , in part, due to dumping of LNG into the gas market from exporters such as Qatar. The LNG shipments make good money just off of the NGL contained in the shipment alone. The LNG is almost gravy on the top so can be sold at low prices. Whilst the volumes may not seam significant, as has been seen before , you don’t need to shift the supply demand balance by much to cause large price fluctuations. The point of this is, with current growth rates in population in the middle east states, the local demand for natural gas (cooling electricity etc) and NGLs is rising quickly. This impacts the gas available for export hence may releive some of the downward pressure on gas prices in the US as imports may reduce.

One other reason to expect higher natural gas prices coming is the traditional link between oil and gas prices. There is a pretty good paper by the IEA describing he linkage mechanism, in short it does depend on the ability of some oil fired power generation to switch to gas and vice versa. If you have a somewhat positive outlook on oil price (if you are Exxon) natural gas prices can expect to pick up making a purchase now of a major natural gas producer a reasonable bargain. On that same line this could have been an acquisition they were thinking about a while back, but held off due to daft prices (Exxon are nothing if not conservative). Given Exon deep water activities, and deep water wells generally produce light crude , condensate and gas - is it possible they were digging around for some production expertise/distribution/sales for gas co produced with deep water wells?
Pure wild arse speculation of course.

I’d hesitate to say horizontal drilling would increase total recovery. Certainly improves total recovery per well/less wells for same recovery and will dramatically increase recovery rates, which helps pay off the well sooner. However as a method of maximising the total recovery of a field - really very rock and pebble dependent, horizontal wells could lead to water out and bypass much sooner. Although as you say, correct completion choice can help minimise that. As ever total recovery is more of a question of economic viability rather than technical ability, in that sense, yes horizontal wells probably do increase total recovery.

Is there a lot of potential for gas drilling offshore as there appears to be with oil? Is there a big difference in the process of drilling/capturing gas versus oil?

Thanks.

Yes - A lot of the Gulf of Mexico shelf production is gas, southern north seas is mostly gas, offshore Qatar, Indonesia, the list goes on, there is really no difference between a gas and oil reservoir and the two are often found together.
Simply put the gas and oil come from the same source rock, and migrate to the reservoir. The difference comes in how long the source rock gets heated and pressured. Generally if a source rock is heated higher for longer it will produce gas. Depending on the depositional environment , some fields will be mostly gas, some mostly oil and quite a few are mixed.

The process of drilling a gas well is identical to that of drilling an oil well, there may be a few minor differences in the casing design (the steel pipe that holds the rock back from falling in after the well is drilled ). Also with Gas wells one tends to like to keep the diameter of the hole as large as possible down to the reservoir, this is not as critical for an oil well. Once you have drilled the big differences comes in the completions. the completions are the pipes and valves that go inside the well to control the production, and in the top side facilities to handle the produced gas/fluids.

Once a well is drilled through a reservoir section, the company, based on top side production facilities, availability of gas pipelines (oil is easy to transport, gas, not so much) and the drive mechanism for the reservoir may elect to just produce the oil, or both oil and gas. Often the gas cap above the oil is the pressure drive to push the oil to surface.

There are many exceptions and variations, however that is a broad brush out line of oil and gas production.

NBC

Here is an article from Politico that was sent out in my company’s monthly e-mail basically laying out where the country is with our natural gas situation. Since this thread was still on the front page I figured I’d update with a little more information.

They’re tripping over new gas reserves and we have a 90 year supply now. There is no way in hell I’m signing any long term natural gas contracts.