NEW YORK (MarketWatch) ? Independent natural-gas producers grappling with stubbornly low prices and bloated inventories find themselves trying to drill their way out of the current supply glut, even with weak demand for their products.
The seeming paradox of higher production in the face of ample supplies will continue through 2011 and may squeeze some smaller players, says industry pundit Peter Bennett of Bentek Energy, a consulting firm with 300 clients in the oil and gas business.
?Production continues to climb and may hit a record in 2011 or 2012,? Bennett told a gathering of about 200 energy investors and company executives at the BMO Capital Markets Unconventional Gas Conference, held Tuesday at the Grand Hyatt New York. ?We don?t think you?ll see a big drop off in natural-gas production any time soon.?
Even though companies like Chesapeake Energy Corp. (CHK 27.83, +0.49, +1.79%) and Southwestern Energy Co. (SWN 38.39, +0.12, +0.32%) specialize in natural gas, they?re getting much higher returns on oil they find while drilling horizontal wells.
Oil prices have climbed to more than $90 a barrel, up handily in recent months, while natural-gas prices have remained stubbornly below $5 per million British thermal units.
That?s expected to continue, with natural-gas prices seen averaging between $4 to $4.50 per million British thermal units in 2011, Bennett said.
?The quest for oil is motivating drilling activity,? said Bennett.
BMO Capital analyst Jim Byrne said these price dynamics have made natural-gas firms more bullish on oil production.
By using lateral drilling techniques developed to produce shale gas, natural-gas firms are tapping into small pockets of oil that had been inaccessible until recently.
The trend has made U.S. fields that contain natural gas and oil much more desirable than traditional ?dry gas? fields that contain plain old natural gas.
The more coveted regions right now include the Permian basin in west Texas, as well as the Eagle Ford region in south Texas and the Bakken region in North Dakota, Byrne said.
The quest for oil is producing larger amounts of so-called associated gas that?s produced as a by-product of crude drilling.
The increase in associated gas production will help offset drops in traditional natural-gas production. It also makes it harder to forecast natural-gas production by counting the number of natural gas rigs in the ground, Byrne said.
Many of the U.S. shale gas fields are profitable if natural gas stays above $2 per million British thermal units, Bennett said.
But low natural-gas prices may squeeze some smaller firms that may not have access to these more economical fields, Bennett said.
While natural production approaches record levels,demand is expected to continue to rise modestly as the economy picks up steam, Bennett said. One trend helping natural-gas producers is a shift away from coal for generation of electricity, he said.
At last check, the Energy Information Administration reported 3.1 trillion cubic feet in storage as of Dec. 31. Stocks were 190 billion cubic feet above the five-year average of 2.9 trillion cubic feet.
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