Sunday, February 12, 2012

What China and France Expect From Their U.S, Shale Gas Plays (DVN; CHK)

The futures closed at $2.477 on Friday. The front month fell in late January to $2.231, a contract low and the lowest price for a front month since March 2002.

We are betting on sub-$2.00 spot as natgas storage tops off in late spring. As the futures converge to spot with each expiration the bet is basically that prices will resolve in the direction of the cash market. The announced cutbacks in exploration and development are too small to keep incredible volumes of gas being thrown on the market, a huge headwind for the futures despite their extreme contango, the Jan. 2013's closing at $3.662.
From Natural Gas Europe:
With Gas Prices Low, Shale Bargain Hunters Take Long-term View
Foreign investment in U.S. natural gas got off to a heady start this year when China's Sinopec and France's Total SA dumped billions into formations in Ohio, Michigan and the Gulf Coast. But now that the price of gas has tanked and reserve estimates have been modified, some financial analysts are wondering whether the companies paid too much for stakes in reservoirs that have yet to produce.
The news that China Petroleum & Chemical Corp., or Sinopec, and Total had targeted the U.S. market at nearly the same moment in early January was met, at the time, with more talk of a "golden age" of natural gas that would see shale development help the United States kick its addiction to coal and possibly create a lucrative export market.

The deals gave Sinopec, one of China's largest state-owned energy companies, a one-third stake in a number of plays owned by Oklahoma City-based Devon Energy, while ceding a 25 percent stake to Total in Chesapeake Energy's sprawling acreage in the Utica Shale.

But much has changed in the short time since the foreign incursion went public early last month. Since then, unseasonably warm weather on the East Coast, combined with a glut of gas production, has seen prices drop to a 10-year low, prompting companies like Chesapeake to suspend some production until the surplus eases or late-winter weather turns cold.

Add to that new data that appear to show earlier estimates of U.S. gas reserves may have been wildly inflated. According to a revision published last week by the U.S. Energy Information Administration, shale gas estimates may have been off by as much as 40 percent (Greenwire, Jan. 23).

In response, analysts say markets may have to wait at least 18 months for the price to recover and profits to rebound, with some suggesting that this bout of warm weather could be less of an anomaly than producers would like. In the short term, Herve Wilczynski, a partner in A.T. Kearney's energy practice, said the current dynamic could hurt independents that don't have the capital to survive the long haul.
That partly explains why companies like Exxon Mobil, Statoil and -- yes -- Sinopec and Total have taken positions in shale gas to bolster and possibly squeeze the smaller independents, which will have a harder time toughing out the price collapse, Wilczynski said.

"It's going to stay at a point that continuing to drill for shale gas is not going to make a lot of sense," he said.
In other words, Sinopec, Total and Exxon Mobil may be the smartest kids on the block. They can withstand the volatile world of commodity markets better than Chesapeake or Devon Energy and could be making bets that healthy capital reserves will force out smaller players. That likely explains why both Sinopec and Total opened their wallets to the tune of more than $2 billion each

"The price was steep ... but they have the money to make those bets," Wilczynski said. "They're in it for the long haul."

Bringing expertise back to China
With respect to the Chinese company, Wilczynski and others see a theme at work for the emerging economic power across the board. Sinopec and other Chinese firms are looking past the 24 months most analysts say it will take for gas to recover, to markets and resource availability decades in the future -- both to make money and to develop expertise in the field.

Andrew Lipow, president of Houston-based Lipow Oil Associates, noted that Chinese firms have lately pushed into Africa and Canada as well as the United States. This is part of what seems like a coordinated strategy to corner natural resources for an economy that most economists expect to one day soon pass the United States as the largest on the planet....MORE