“Gas is the fuel of the future,” said Peter Tertzakian, chief energy economist and managing director for ARC Financial Corp. “Do not forget that. It is growing tremendously in other parts of the world, and so it should. It is a compelling fuel and a compelling substitute, and the rate of growth is comparable to when the Westminster Gas Light and Coke Company took root in the early 19th century.”
Gas has undergone surges and ebbs in popularity ever since, he told a capacity crowd at the Calgary Petroleum Club in a talk entitled Natural Gas: An Orphan’s Story.
While cutting back on gas production right now makes sense “from a profit maximizing standpoint,” it just doesn’t seem right, he said. “People want the stuff and you’re orphaning it. That in itself is sort of a very qualitative argument that at some point something’s got to give,” he told an industry audience.
According to Tertzakian, global consumption recently surpassed 300 billion cubic feet per day and is growing at approximately three or four per cent per year, which is about two times the rate of oil production growth.
In the Asia Pacific, gas output is increasing about seven or eight per cent per year, compounding on a very large volume of about 50 billion to 55 billion cubic feet per day. “That’s like four billion cubic feet per day per year. That’s like four Kitimat [B.C.] terminals every year.”
In 2010, growth was a “staggering” 13 per cent and with Japan’s current nuclear outages and its replacement with natural gas, Tertzakian expects even stronger demand to be reported for this year. “It is the darling as it was in the early-to-mid 19th century…. It is a darling in another part of the world.”
Then, as now, oil was more highly valued and the gas that came up with it during production was so little valued it was simply vented. “Who needs this stuff? Natural gas is the least appreciated, consequently it’s the most abused of the mineral resources in popular use,” said Tertzakian, bestselling author of A Thousand Barrels a Second and The End of Energy Obesity.
Its popularity surged again starting in the 1930s with the ability to weld high pressure pipelines that could carry gas long distances, and the resulting construction took place to usher in the home-heating era.
Now, because multi-frac horizontal drilling technology has unlocked shale gas, taking production from one billion cubic feet per day in 2006 to the current 22 billion cubic feet per day, its value has dropped again. The price of gas is down to about $4 per thousand cubic feet, while on the other side of the world, in Asia, it’s now about $16 per thousand cubic feet, he said.
Gas has gone from darling to orphan continuously, but it continues to grow. “The precedence suggests you can go from orphan to darling very fast.”
This is a period of very extreme changes, whether it’s oil, gas or energy as a whole, he said. “Do not believe any number that you see out there without investigating it in great detail. If you are doing your strategic planning, if you make dollar decisions, do not take verbatim what people and agencies and others are telling you. Do not follow the herd’s mentality. Do your homework. Do not believe what you see.”
Tertzakian said there are forces at work to close the Canada-Pacific arbitrage. “That’s a big arb. The whole North America versus global gas price arb is just gigantic. We are a free market, and a free market has ways of working these things out and we will be the beneficiaries, so I’m not really clear why people are so bearish on price when it comes to recognizing that the arb will eventually be closed.”
According to his research, the top 10 publicly traded North American producers’ gas production, representing a third of U.S. production, has levelled off after a growth period.
He believes there will be less gas deliverability going forward. From 2001 to about 2006, the industry had to replace 12 billion cubic feet of gas per day. The treadmill’s going faster and current replacement volumes of 22 billion cubic feet per day have to turn over, requiring $80 billion to $90 billion a year of capital just to offset declines, he said.
Meanwhile, there’s an under-reported phenomenon he called “adopting the orphan.” The demand side is now getting comfortable with the low price of gas, almost to the point of being considered again for industrial use, and is already replacing coal to a certain degree, said Tertzakian.