Don't focus too much on what the seasonal trends in natural gas demand are telling you. The technology trends are trumping them - and they're changing the entire nature of the North American gas market, contends Patricia Mohr.
"New 'game-changing technology' - improvements in horizontal drilling and multi-fracturing of unconventional gas - has dramatically changed the dynamics of the North American natural gas market in the past year and a half," the Bank of Nova Scotia economist and commodities specialist said in a report yesterday.
She noted that horizontal rigs made up 46 per cent of active drilling rigs in North America last month - almost double their share of drilling activity in January, 2008.
The rapid adoption of horizontal-drilling advancements has triggered an explosion of new unconventional shale-based gas output that features lower production costs and improved well productivity. So, production volumes have remained strong in the past year, despite slumping prices.
"While U.S. gas-targeted drilling activity plunged by 42 per cent from January through July, 2009, [energy research firm] IHS Herold estimates only a 1.5-per-cent [quarter-over-quarter] decline in U.S. natural gas production in [the third quarter]," Ms. Mohr wrote.
"The apparent disconnect between drilling activity and production reflects much greater individual well productivity with horizontal, multi-fractured drilling, and considerably greater initial flow rates from shale developments than conventional vertical wells," she said. "While active drilling rigs have plunged and higher-cost gas wells have been shut in this year, producers continue to drill higher-quality shale prospects with high initial flow rates."
The quantum shift in North American gas production techniques goes a long way to explaining the ballooning gas supply levels that sent gas prices to seven-year lows this summer - and have continued even as seasonal expectations for rising demand have turned prices upward in recent weeks.
Illustrative of how acute the glut of natural gas has become - in North America and globally - Bloomberg News reported yesterday that liquefied natural gas from overseas is afloat in tankers in the world's oceans, with no ports' buyers prepared to accept them.
Read more on the Market Blog at tgam.ca/marketblog
