CompressorTechTwo - 2010 (Sample)

A PROMISING YEAR AHEAD
A Variety of Indicators Suggest Growth in the Natural Gas Market in 2010
By Harold Lampe

Early indications are that there is growing optimism in the energy industry for the upcoming year. After what can best be described as a dismal 2009, E&P companies are increasingly willing to augment their investment plans for the coming year. Even those that have opted only to sustain their budget at previous-year levels will be able to increase activity as costs for drilling and completions have declined across producing basins in the North American market.

This growing optimism was recently confirmed with Barclay Capital’s publication of its annual survey of global spending on oil and gas exploration and production. The survey of 387 oil and gas producers led Barclay to project that expenditures will increase by 11% over that of levels seen in 2009. The survey projects that expenditures will increase for both the U.S. and Canadian markets. The U.S. is expected to see an increase of 12% to US$79 billion, driven by increased investment in drilling for natural gas in shale deposits. The Canadian market is expected to see an increase of 23% to US$23 billion, part of which is attributable to the strengthening of the Canadian dollar.

Another positive signal in the market is the willingness of E&Ps to draw on credit to support expanded capital investment plans. This is in comparison to the previous year when most companies set their investment budgets based on projected cash flow.

From current releases, associated with the announcement of capital investment plans, most E&Ps are basing their investment strategy for natural gas based on prices ranging from $5.50 to $6.00/Mcf for the coming year. Comparably, the Barclay survey found that firms surveyed were projecting an average natural gas price, for their 2010 budgets, at $5.21/Mcf. EIA, in its current edition of its “Short Term Energy Outlook,” is estimating

Henry Hub spot price will average $4.62 per Mcf in 2010.

While storage remains a significant concern, current weather patterns have encouraged investors. December weather patterns have had significant impact on consuming states of the Northeast and mid-Atlantic. December draw on natural gas is running 20% ahead of both that of last year’s number as well as that for the five-year average. Unfortunately, current storage remains 10% over that for those comparable periods.

Rig activity continues to strengthen after bottoming out in July. For December, average number

Harold Lampe

Harold Lampe is the principal of Energy Research Services of Tulsa, Oklahoma, U.S.A., which provides market research, customer satisfaction analysis, competitive and market intelligence and business development strategies for the energy industry, on which he has focused for over half of his 30 years conducting market research projects. He can be reached at hlampe@hotmail.com.

of rigs drilling for natural gas was 757 in comparison to 675 in July. In its most recent edition of its Drilling and Production Outlook, Spears & Associates is projecting that rig activity in the U.S. will average 1156 in 2010, of which an average of 808 will be drilling for natural gas. One of the more interesting findings is the regional variance that will occur during 2010. While the Marcellus shale and Haynesville shale rig activity will trend higher, other gas producing regions will remain at or below average drilling rates seen in 2009. In addition, Spears & Associates is projecting that rig activity in Canada will average 225 rigs, with the average number of rigs drilling for natural gas falling by 5% over that of 2009. The Canadian Association of Oilwell Drilling Contractors is currently projecting an average of 218 rigs for 2010.

Market activities during this past quarter should lend some encouragement to the outlook for natural gas. ExxonMobil’s announcement of its proposed acquisition of XTO is being seen by the investment community as an endorsement of natural gas. In addition, Devon Energy’s announcement of the planned disposal of offshore assets to focus resources on onshore production is also seen as encouraging.

Regardless of the market’s current view, much remains dependent on what the upcoming year’s news will bring regarding the U.S. and global economy. While generally there is growing optimism that the economy is on the rebound, the rate at which it rebounds remains uncertain. Consumer spending, an underpinning of the health of the economy, remains muted, and with unemployment remaining high, the ability of the U.S. economy to rebound quickly will be challenging.

As for my projection for the New Year: “2010 will be better than 2009 for the natural gas and compression industry.” Pray it will be so for each of you. ;