New Book on Decline in Natural Gas Production and Spiking Prices
There is a new book that was just published titled "Cold, Hungry, and in the Dark - Exploding the Natural Gas Supply Myth" ( see the powersenergyinvestor website) with an extensive analysis of the natural gas business and markets predicting a decline in US natural gas production starting in 2013 with a spike in prices.
The thesis of the book is that there was a massive investment in shale gas exploration in 2009 - 2012 resulting in a collapse in pricing and new gas drilling. The aftermath of the shale boom will be declining production starting in 2013 with higher prices.
In the bigger picture, US conventional gas production is in decline and the shale gas reserves are much lower than forecast at existing prices. The author (Bill Powers) shows the relationship between prices and reserves so only at much higher prices are the shale gas reserves profitable for oil and gas producers.
The bottom line of this book is that natural gas prices are much too low in the US now and prices will be on a multi-year rise soon. Sometime in 2013, US natural gas production will enter into decline and the spot markets will make a quick u-turn as traders understand that the decline will take a long time to reverse because of the collapse of drilling and high shale gas well depletion rates.
While the natural gas traders focus on the weather forecast, there is a tsunami wave building with the collapse of drilling and depletion which will hit the shore of natural gas production later in 2013.
The trader attitude is that as long as the weekly EIA report shows no natural gas production decline, then it is not going to happen since the production trend has been up for the last several years.
The oil and gas producers have a longer term perspective knowing that eventually the dry gas drilling budget collapse will impact production. They are doing minimal hedging of future gas production now (only enough to satisfy their bankers) and betting that natural gas prices will jump once the declining gas production trend becomes evident to the traders.
The underlying economics of why this is happening relate to oil and gas profitability with current natural gas prices far below cost for most producers so there is little incentive for new dry gas drilling. The recent drop in gas prices below $4 mmBTU makes the situation more extreme and will bring forward the production decline more quickly.
I am looking forward to seeing this trend play out in the next 12 months.