Tuesday, June 22, 2010

From the British Blog No Hot Air

Jun 21, 2010

Natural Gas Storage

The WSJ describes here a new, and to the non-expert, rather obvious way of producing and storing gas: Keeping it in the ground.

Because thanks to gravity gas flows out of the ground, until now it's been hard to modulate up or down. It comes out of the hole in the ground and although it declines over time, it's hard to switch it on or off. This causes bizarre economic outcomes, because demand for gas is seasonal. Which explains why there is gas storage. If it was possible to have enough gas wells to deal with one in 40 year demand levels, which it is, it wouldn't work because there would soon be so much gas that it would either go to waste, or actually get flared off as it is in Nigeria and Iraq. There is another issue in that much conventional gas is associated with oil production and if the gas isn't released then the oil can't be pumped either. Which explains why the actual cost of production of gas can actually be negative. Back in the days when North Sea oil was $25 or so, it was estimated that some gas landing at St Fergus in Scotland from North Sea associated oil fields had a cost of minus 4 pence per therm, in the days when the spot price was about 10 pence.

Some people use a similar theory to explain how Qatar can produce gas so cheaply, in that the true prize is Gas to Liquids for fuel. Gasoline or Diesel derived from gas is the true money-spinner according to that theory, and natural gas is a by product that technically the Qataris should pay people to ship away and burn.

Two big swing fields in Europe can be modulated up or down to reflect demand, Groningen onshore Netherlands and Morecambe Bay off shore Lancashire NW England. Both fields by the way are very close to possibly big shale plays.

Shale, as Art Berman likes to tell people declines rapidly, to 80% of it's opening peak within 18 months allegedly. Berman says that this makes shale uneconomic at less than $7-8 MMBTU. I say a lot of people disagree with him. But in Louisiana's Haynesville shale, they may have discovered ways of defying gravity in that they can choke gas:

Natural gas producers are choking back production from wells in the Haynesville Shale, a prolific natural gas-bearing rock formation in Texas and Louisiana, as a way of boosting the overall efficiency and life span of those wells.

The technique represents an important shift in the exploitation of gas from the dense sedimentary rock formations known as shales. Frenzied development flooded the natural gas market last year with, shale gas and the recession cut deeply into natural gas demand, pushing prices to a 7 1/2-year low last September. Now more measured growth from shales could help mitigate future gas gluts and allow for more orderly development of these gas-rich assets.

More orderly development will mean more orderly prices:

We are trying to optimize the reservoir," Kelleher said, noting that the company is trying to come up with the best "economic case" for the Haynesville shale. Devon will drill as many as 30 shale wells in the Haynesville area this year.

Companies have used other techniques to slow production from these fields such as drilling wells without completing them so they can bring production online at a later date and, perhaps, at better commodity prices.

A throwaway at the end here, which shouldn't have been. This could change the economics of gas (and storage) for both better and good:

Producers are starting to think about using these producing assets as a surrogate for storage," said Rusty Braziel, managing director for BENTEK Energy, which tracks energy-market data. Braziel notes that these techniques have an added advantage of allowing companies to manage through volatile swings in natural gas prices.

Surrogate for storage. Disruptor for prices.