Demand, say Hello to Supply

Investing in energy makes more sense than ever

Demand has surged… reflecting the myriad new uses for natural gas in industry and as a clean-burning source of electric power.”
— Alan Greenspan

Why invest in Oil and Gas? In a world starving for energy, it makes sense to invest in the supply of this vital resource. Domestic demand for natural gas continues to rise, with almost every new home in North America configured to use natural gas. California in particular is starving for energy, adding 900 mmcf per day to its demand in past months. [1] Most new power plants built in the US are federally mandated to be natural gas. Experts are expecting natural gas demand to continue to grow by 40–54% from today’s levels by the year 2020.

The trend continues

Early in the year 2000, the natural gas supply demand in the USA became crucial, tighter than it had been in three decades. Apathy resulting from low prices kept serious efforts at gas development to a minimum. A series of mild winters masked the decline in output. Eventually the squeeze in supply propelled gas prices upwards to a staggering level of $10 per mmcf (million cubic feet) at the end of that year, affecting homeowners and businesses across the country.

Prices quickly recovered to a more reasonable $5 per mmcf, but production remains tight. Consumers are complacent, but industry experts continue to be alarmed at the gas supply shortage. Production has not increased to meet the potential demand for natural gas. Stored reserves have not recovered to required levels. The price of natural gas is currently at around $4 per mmcf, providing significant upside potential, especially in light of the recent increase in oil prices.

Turning to our Northern Neighbor

Drilling rates have fallen over the past couple of years, causing overall production to fall short of demand. America’s gas majors which produce almost a third of the country’s natural gas are currently operating just over 100 rigs in the US.

With depleting supply in Texas, an increasing number of American energy companies are turning to the vast natural gas resources in Canada.

Plenty of pipelines, a strong production and processing infrastructure, high reserve levels and a low Canadian dollar make Canadian gas supply very attractive.

Increasing Results Without the Risk

Exploratory drilling (also known as “wildcat” drilling) remains risky and takes a long time, but there are many ways energy companies can increase output from discovered reserves without the risk of wildcat drilling.

To prepare for the anticipated demand crisis and resulting price increases, energy companies are now partnering to complete “in-fill” drilling, a process where additional wells are drilled in an existing field to increase output and take advantage of higher prices whenever they happen.

Because there is much lower risk, in-fill drilling is a more attractive option in terms of providing financial return for the companies involved.

Oil also facing a shortage

Oil producers are also struggling to meet demand. Depleting supply in America has been offset by easy access to foreign oil. However, China’s explosive industrial growth continues to increase demand for foreign crude oil at staggering levels, increasing by 14% in 2004 alone to 288 million tons. [2]

This demand along with increasing demand and lack of reliable supply in other countries such as the former Russian republics and India may have an impact on oil prices. As a result, petroleum reserves that are quickly accessible in the US and Canada will benefit significantly should an oil price increase take place.

1 Source: Equity Research
2 Source: People’s Daily Online