Higher U.S. natgas price needed to boost shale growth -economist

HOUSTON, June 20 Fri Jun 20, 2014 6:06pm EDT

HOUSTON, June 20 (Reuters) - The prospect of cheap natural gas prices fueling an industrial renaissance in the United States is at odds with the needs of gas producers, an energy economist said this week.

U.S. gas production from prolific shale formations is expected to reach 73 billion cubic feet a day this year, the fourth annual record output, according to government projections.

But continued growth is unlikely unless current prices rise substantially, said Gurcan Gulen, senior energy economist at the Center for Energy Economics in Houston.

"Cheap gas is a relative term," Gulen told members of the Gulf Coast Power Association. "If $3-$4 (per million British thermal unit) is what your expectation was, it's probably not sustainable in the long run."

"Most producers in most locations are not going to make the money they need to continue to drill," Gulen said.

The Center for Energy Economics is part of the University of Texas' Bureau of Economic Geology.

The center has done extensive research on the various U.S. shale formations to determine the amount of oil and gas that can be recovered and at what price companies can profitably continue to drill and invest.

Exploration and production costs for companies like Exxon Mobil, Chesapeake Energy and Anadardo Petroleum vary widely from one shale play to another and even between wells in the same formation, Gulen said.

A gas futures price around $4 per mmBtu "is probably not a long-term sustainable price in North America if you want to get more gas out of these shale plays," he said. "Six dollars might be a more reasonable expectation."

Forward gas prices on the New York Mercantile Exchange have been climging this year, but are running below $5 per mmBtu through 2019.

U.S. gas output has grown even as the rig count has fallen through increased drilling efficiency.

"Companies are drilling a lot more wells with one rig," Gulen said. "If demand increases, we have got to increase the rig count and go back to Haynesville and other dry gas areas."

Understanding the potential of the nation's shale resource base is still a work in progress, he said.

"The shale potential is huge, but we are still learning how much we can produce from where and at what price on a commercial basis," Gulen said.

Experts see demand for gas rising over the next few years from new petrochemical plants and other expanded manufacturing facilities, from exports of liquefied natural gas (LNG) and for power generation.

Compared with government estimates, Gulen expects to see less new gas demand for LNG exports but more demand from utilities as coal plants retire and nuclear plant licenses expire.

"All of a sudden, in 2017, we have a huge demand shock, and whether the supply industry is getting ready for that is a question," Gulen said. (Reporting by Eileen O'Grady in Houston; Editing by Ken Wills)

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