Shale gas production is probably one of the greatest mind twist component in creating a supply\/demand balance for US natural gas.\u00a0\u00a0 My posting has been slowed as I have promised to come up with a long-term natural gas price outlook.\u00a0 \u00a0As a longtime fundamentalist, the supply\/demand model represents the root of the forecast.\u00a0\u00a0 The key steps in creating one is to understand the individual components and developing a logical rationale to what makes each of those components tick.<\/p>\n
The supply outlook for shale is a very fascinating supply side component for which I spent considerable time understanding.\u00a0\u00a0 People will generally work their way through running cost and reserves calculations to get some sort of projection.\u00a0\u00a0 However, I believe this method is invalid here as cost seems to be an impact not a direct variable of production.\u00a0\u00a0 In the long-run, economics should balance with cost; but in the near term, which could be many years, we can have what is perceived to be irrational, but is quite rational decision making on an individual basis.<\/p>\n
The last comment has more to do with management of Oil & Gas companies.\u00a0\u00a0 With much of the incentives for executive management based on stock price, the decisions do not necessarily become making a resilient long-term decision for the company, but what propels the current share price.\u00a0\u00a0 If you examine the markets, you have many players being rewarded on the bottom line production numbers regardless of net profits.\u00a0\u00a0\u00a0 Shareholders have taken to a metric which does not necessarily promote the best long-term decision.\u00a0\u00a0 The energy in the ground (AKA btu) is not going anywhere yet there is drive to produce now vs. later which could be more promising.\u00a0\u00a0 Even looking out on the forward strip there shows a 5% premium a year out.\u00a0 \u00a0This obviously is not really worth the time value of money, but there is an indication that there are better days ahead for producers.\u00a0 Forward curves are a poor predictor of actual outcomes, but it does show market sentiment.<\/p>\n
The analogy of the current market is let\u2019s all slit our wrist and we will see who will faint first.\u00a0\u00a0 Those who faint, their blood will be taken and used to supply another player still in the game.\u00a0 Therefore, if you are playing the game, you better cut cost and look for opportunities to take on those who can\u2019t cut it.\u00a0 In the long run the market will balance, but in the meantime, expect production numbers to be less connected to price.\u00a0Added Note 12\/16 – I understand all the traditional means of forecasting shale from reserve curves, lease retentions, acreage analysis,\u00a0and well economics.\u00a0\u00a0 What I am about\u00a0to suggest is not\u00a0random nor taken lightly but the fact is traditional\u00a0mechanism could not come close to backcasting what has happened over the past 5 years.\u00a0 I don’t believe in using methods that cannot be calibrated to the history.\u00a0 Show me a model that can account for multi-year 40%\u00a0supply growth\u00a0using traditional methods and I will accept that method.\u00a0\u00a0 However I will contend those methods would consistently not been able to forecast what\u00a0has\u00a0occurred.\u00a0 This is largely a result of behavior and technology advancement.\u00a0\u00a0 For this very reason I decided to expand beyond traditional means to see if I could find a METHOD to be able to\u00a0substantiate the past to be able to\u00a0potentially understand the future.<\/p>\n
With that in mind, one needs to examine the development curves of being productive in order to get a view of shale gas production.\u00a0\u00a0 I examined oil production back to 1890 and looked at various time periods of production evolution.\u00a0\u00a0 However, nothing can compare to the current production growth observed in shale gas over the last 8 years.\u00a0\u00a0 I expect the 2012 numbers of shale gas production will be revised to show more like a 10% growth vs. what you see in the\u00a0AEO 2013 figure<\/a>\u00a0of 4%.\u00a0\u00a0Update 12\/19 –\u00a0Natural Gas Annual 2012 came out and\u00a0BAAM! Shale gas production 10.3 TCF vs.\u00a0AEC\u00a0Forecast 10.5 TCF – far from AEO 2013 figure of 8.1 TCF!\u00a0\u00a0 Therefore for 8 consecutive years, you had a production growth from a single source of technology that produced double digit growth.\u00a0\u00a0 My quest to find something \u00a0similar to that pace led me to examine\u00a0Moores law<\/a>. \u00a0However, resources cannot keep up with technology innovation as seen in Moores Law. \u00a0 After many hours of research, I did find a logical and rationale curve which sets the foundation of my supply projections for shale gas.\u00a0\u00a0 Once again, my past has been my friend.\u00a0\u00a0 My diverse experience in all parts of the energy markets took me back to coal to find my answer.<\/p>\n The Powder River Basin coal production was able to sustain 11 years of double digit growth of production.\u00a0\u00a0 Similar to shale gas the BTU was known to exist.\u00a0\u00a0 It was just about jumping the potential energy to make it work and once that was done it was all kinetic energy that propelled the basin from a zero player to 16% of the largest coal market in the world.\u00a0\u00a0 Using the Powder River Basin as a foundation and modifying to shale, shale gas supply will likely exceed current EIA projections of shale gas.\u00a0\u00a0 Before you go out and\u00a0sell the forward strip, the demand picture is also likely to exceed EIA outlook.\u00a0\u00a0Added Note 12\/16 – This is not as random as Chilean Sea Bass imports – there is some fundamental connection to shale gas.\u00a0 You had a known energy source, but a large barrier to untapped the source.\u00a0 Once the barrier was overcome a tidal wave of production came.\u00a0 The recent shape of shale does fit the path observed by PRB.\u00a0 The future of shale will likely revert back to the fundamental variables of production, but to be able to account for the current evolution and behavior the PRB history is more capable of describing the potential.<\/p>\n I have described the foundation of the supply outlook, but not the actual mechanism of my forecast as I still need to make due for my lovely family.\u00a0\u00a0 My demand models are coming along and eventually the final price projections.\u00a0\u00a0\u00a0 If there is interest, please contact me to schedule a presentation at your company where I will go over the outlook and take questions and answers.\u00a0 The cost of this endeavor we can discuss on an individual company basis and based on my timing.\u00a0\u00a0 Those who book earliest will get the best deal.\u00a0 You can contact me at 614-356-0484 or email me at\u00a0dkb@allenergyconsulting.com<\/a><\/p>\n I do have a proven and successful track record in forecasting commodities and developing world supply and demand models.\u00a0\u00a0 You can see my front page USA Today prediction of the crude oil collapse in 1998 \u2013 March 10, 1998.\u00a0\u00a0 I was also very prescient at AEP \u2013unfortunately those forecast are behind the close door, but many do know I was the bull in the early 2000 and turned to be quite a bear as the market went crazy in 2008.\u00a0 The markets will change and you need to be fundamentally connected at all times.<\/p>\n Your Fundamental Energy Consultant,<\/p>\n