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Perry Management, Inc.


Perhaps it may seem strange to talk about natural gas at a seminar on wind-generated power. But let me assure you, wind generated power and natural gas generated power DO NOT compete with each other; instead, they complement each other, and we will talk more about this later on.

As an overall policy, we need to support the development of every source of energy available in the United States. I am reminded of the words of Frank Pitts, an old time independent producer from Dallas. I heard him testifying before a Senate committee in the early ‘80’s. When asked by Senator Inouye of Hawaii what he thought of a plan to grind up sugar cane stalks from sugar mills and use it for boiler fuel in power plants, Frank replied, “I am all for it, Senator. Before this is over, we will need every source of energy we can find.” And that is where we still are in the US some 30 years later. We should forget trying to develop any single source for our energy requirements and concentrate on developing all economical sources of energy that are available to us.

Cut That Out!

I am dismayed by some recent actions by various segments in energy industries. I have been told that the American Gas Association has advised its members that they should support the so-called “cap and tax” bill. AGA maintains this bill will run coal out of the business of supplying fuel for power plants because of the greater amount of carbon dioxide that coal generates. (But I will tell you, the “cap and tax” bill is not good for energy producers nor for energy consumers. It is only favorable for the US Government in its ever-increasing thirst for tax revenues.) Now I hear that the coal industry is retaliating by supporting efforts in the Congress to regulate hydraulic fracturing of the shale formations that are the new source of gas for this country. This is comparable to your kids picking at each other. So I say to both of these segments of the energy industries, “Cut that out!” We all need to work together to supply as much economical energy as possible from all available sources.

Gas Generation Related to Wind Generation

In the matter of “gas generation related to wind generation,” and it is not “gas generation versus wind generation,” these two sources of power definitely complement each other. Experience has shown that wind generation only produces power approximately 30% of the time overall, for various reasons. The most frequent reason wind power is down is insufficient wind. When this occurs, gas generation is essential to supply power when wind velocities are not sufficient to run wind generators. Sometimes, the wind drops unexpectedly and gas generation must be ready to bring online in very short periods of time. Only gas fired combustions turbines can be started rapidly, and sometimes even they cannot be started as quickly as needed. Steam power plants (either gas fired or coal fired) cannot be used as standby for wind generation because they take too long to start up from a cold start.

When the grid is fed with a large amount of wind-generated power, it can be unstable and difficult to operate. When this is anticipated, the grid operator may keep some combustion turbines running on standby, or “spinning” (which is not as fuel efficient as desirable, but is necessary.) But when one analyzes this situation, it is apparent that wind does displace a lot of gas, and this represents gas that can be conserved for future use. But gas is essential as a standby replacement fuel for wind. Also, because gas must be used for power plant fuel during the 70% of the time when wind is down, wind does not conserve as much gas as wind proponents would like, but it is what it is. Long term the answer could be technology that would allow wind generators to store electric power for future use. But such technology does not exist today.

So for now, wind generators and gas fired turbines are partners in supplying electric power for Texas. Both forms of generation needs the other as a partner to supply continuous, low cost power and at the same time, conserve as much fossil fuels as possible.

A Look at 2007 – 2010: Production and Consumption

The following Table 1 is the summary of Supply, Demand, and Consumption of Natural Gas in the U.S. for the period 2007 through 2009, plus forecasts for 2010:




As noted above, natural gas production increased 10.6% from 2007 to 2009. This increase was due almost entirely to new shale gas production mostly from the Barnett Shale in North Texas. But this boom caused over production in gas in the US, and this oversupply along with a recession caused an excess of gas, which drove wellhead gas prices down from $8.07 to $3.70 in 2009. During this time, consumption dropped 1.0%. (See Table 2 below for average wellhead gas prices.)



Another interesting figure in these data is imports. Canadian natural gas imports are forecast to be 13.4% of total gas supply in 2010, but LNG imports are expected to be only a nominal 1.77% of total supply. This is incredible after all the money spent on import terminals in the U.S. is resulting in only a miniscule amount of the total gas supply for the U.S.

Shale Gas – The Bright Spot of U.S. Gas Supply

Oil producers have known for a long time that there are a lot of hydrocarbons locked in shale deposits. But getting the hydrocarbons out of the shale has been frustrating up until recently. Typically, shale formations have low porosity and low permeability. To only call shale a “tight” formation is an understatement.

There was no single technical breakthrough that made production from shale economical. Instead, the technique of horizontal drilling and massive frac jobs “evolved” over a period of years (and it still “evolving” with improvements in these technologies.) This proves that where there are formations containing oil and/or gas, oilmen will eventually find a way to extract it.

The Barnett shale located in North Texas was the first shale gas field to be developed extensively and currently, approximately 60% of the potential wells in this field have been drilled. Development of this field was a real boom during 2007 – 2009, with lease bonuses running $25,000 per acre and royalties running 25%. However, when the price of gas dropped from $8.00 plus to $3.50 per mmbtu, the boom came to a halt. Estimates are that gas prices must be $5.00 to $5.50 for Barnett shale wells to be profitable with a 10% IRR.

However the success of the Barnett shale led to oilmen looking at many other shale formations and they were successful in drilling many of these. It should be noted that technology for completion of shale wells will be slightly different for other shale formations, and also vary depending which part of the field is being drilled.

The following Table presents major data about the more prominent shale fields:



Other shale formations which are being, or will be explored for gas include: Cedar Creek (Montana), Wind River (Wyoming), Green River (Wyoming), Lewis and Mancos (New Mexico), Barnett West (West Texas), New Albany (Illinois), Antrim (Michigan), and the Utica (New York and Pennsylvania). It is estimated that the major shale fields have about 80,000 potential well locations, but as of now, only approximately 15,000 have been drilled. When fully developed, shale has the potential to produce about 25 BCFD, or about 40% of the total U.S. gas production.

Shale wells are quite expensive. The cost for the horizontal drilling is expensive, but the major costs are in multiple stage large frac jobs. All of this is necessary to provide the maximum bore hole exposure to the formation, plus providing numerous fractures through the formation, and is essential to adequately drain the tight shale formation. Barnett wells costing $4 million to drill and complete are not unusual. Deeper shale formations are even more expensive to drill and complete.

Shale wells initially produce a lot of gas (for example, about 4 mmcfd in the Barnett, or about 20 mmcfd in the Haynesville). Production in about 2 years drops to approximately 15% to 20% of the initial production, but the production then remains steady for many years. Expected life of a shale well is at least 30 years, whereas production from a shallow Gulf of Mexico well may be only 5 years. In summary, shale gas will be a major source of gas for the U. S. for many years.

Some analysts have questioned whether shale gas production is sustainable. However, based on experience with other tight formations (such as Austin Chalk), it is my opinion that it will be a long time source of gas.

Government Intervention

Indications are that the Obama Administration will comply with many of the desires of environmental interests and drastically reduce the amount of domestic drilling. Already, in spite of claims to the contrary, Obama has cut domestic onshore leasing to about 44% of the onshore leasing by the Bush Administration, and to less than 33% of onshore leasing by the Clinton Administration. The number of lease parcels granted by the three administrations are as follows:
Obama Administration (2009) 1,313 per year
Bush Administration (2001 – 2008) 2,976 per year
Clinton Administration (1993 – 2000) 3,976 per year
Interior Secretary Salazar explained this reduced drilling to be the correction of the Bush “drill now, drill everywhere” policy, but he failed to mention that the Clinton Administration had a more liberal onshore drilling policy than the Bush Administration. Secretary Salazar claims he “offered” 2542 parcels for lease, but due to various reasons, Interior only leased 1212 of these offered leases as of 12/1/09, projected to be 1313 by year-end. In his State of the Union address, President Obama did say he wanted more offshore drilling in the Gulf. Time will tell whether this will actually occur.

In addition to reduction of available leases to drill, there is great concern over the proposal that hydraulic fracturing be controlled by Federal Government regulations, presumably as a protection of potable water supplies. Fracturing has been controlled by various state agencies from the beginning, but in spite of the fact that there is no occasion where hydraulic fracturing of oil or gas formations contaminated any potable water over the 50 plus years that fracturing has been used, there continues to be pressure on Congress to enact these regulations. Indications are that this push to control fracturing is politically motivated by environmentalists and by the coal industry to inhibit drilling for shale gas. Without hydraulic fracturing, shale gas is not economical to produce.

Local authorities are also inhibiting drilling in certain areas of New York and Pennsylvania where Marcellus shale prospects are located.

How About LNG Imports?

In spite of billions of dollars invested in LNG receiving terminals in the U.S., LNG imports are nominal into the U.S. Projected imports for 2010 are about 410 BCF, or about 1.77% of total gas supply for the U.S. However, the U.S. has the second highest import capacity in the world, and perhaps the most storage. World LNG supplies are exceeding the market now, and there are reports of LNG tankers being diverted to the U.S. to take advantage of the storage here, and these loads of LNG are being dumped at whatever price they will bring.

The U.S. has the capacity to receive 6.5 TCF/Yr. per year now. In addition, there is 0.25 TCF/Yr. capacity under construction and 2.5 TCF/Yr. additional capacity that has been approved. When all construction is completed, the U.S. will have a total of 9.24 TCF/Yr. in LNG import capacity. This is equal to about 40% of the total gas supply to the U.S. now – to say this capacity is vastly underutilized is an understatement.

However, overcapacity of LNG import capacity seems to be the norm. Japan, which is totally dependant on LNG for their natural gas supply operates 8.7 TCF/Yr. import capacity to import a total of 3.37 TCF for year 2008. Thus the Japanese utilize about 40% of their total import capacity. The world market for LNG totaled 8.38 TCF for year 2008, or about 35% of the total U.S. market.

It is fair to say that LNG business in its infancy in the U.S., and is yet to be fully developed other than in Japan and Korea. Liquification technologies have advanced steadily over the last 40 years, resulting in drastic reductions in the cost to make LNG. Also, large reserves have been discovered in areas with little need for the gas. These two factors have resulted in rapid growth of LNG that can be economically delivered worldwide. Much of this LNG is being developed and liquefied by government owned oil companies, who have a tendency to make LNG and then dump it on the world market at whatever price it may bring.

In early days of OPEC, their supply of crude oil available and the price they would accept set world crude oil prices. (Now, prices for crude oil are set more by crude oil future prices and are frequently driven by speculation.) But now we are beginning to see world natural gas prices set by the LNG world trade, and the tendency of world government owned oil companies to dump natural gas. This has just begun to impact U.S. prices. But with the amount of investment that has been made worldwide on LNG liquification plants and receiving terminals, some big investors are betting heavily on a robust and growing future market for LNG.

The following Table 4. indicates LNG import terminal capacities which are operational, under construction, or approved:



Summary and Forecast

With the availability of multiple shale gas reservoirs and growing LNG supplies, the natural gas supplies for the U.S. appear to be plentiful for at least 20 years. Of course, this does not bode well for natural gas prices for producers. On the other hand, the ability of the United States to stay competitive in world markets for other goods will be enhanced by this availability of economical supplies of energy. With supplies being what they are, there is little to move gas prices up much beyond the current range of $5.00 - $5.50 per mmbtu at the well head for at least all of 2010. Beyond this year, we will see prices slowly rise to keep up with inflation until the world begins to be constrained by natural gas supplies. At that point, natural gas prices will rise to be on a parity with other fuel costs such as crude oil (which on a BTU equivalent basis has a ratio of 6 mmbtu of gas equals 1 bbl. of oil. At current oil price equivalents, 1 mmbtu of gas should sell for $12.50.)


Charles R. Perry is President and CEO of Perry Management, Inc., a consulting firm in Midland, TX.  He is a Registered Professional Chemical Engineer in Texas, and has had over 50 years experience in the oil, gas, and electric power industries.  He is the holder of numerous patents, and the author of many technical papers, and his background includes both top management and technical development in energy businesses.