Discoveries

Tom Petrie, vice chairman, Merrill Lynch & Co., spoke at the Oil & Services Conference VII last week. I just listened to the webcast of his talk, and Petrie made some of his usual shrewd observations about the state of oil and gas industry.

Today’s low commodity prices are a symptom of both self-reinforcing pessimism and the reality that long-term demand elasticity has been triggered, he said.

Specifically on natural gas markets, Petrie said that a perfect storm hit the business between mid-2005 and about a year ago. During that time, an earthquake in Japan disrupted two nuclear plants, new LNG capacity was seriously delayed, and the start-up of the Snovit project offshore Norway was troubled. All contributed to an extremely tight global gas market.

This year, world LNG supplies are projected to grow 30%, followed by another 18% in 2010. LNG will likely saturate Asian markets by this summer, then move into the U.S. Clearly, for the second and third quarters of 2010, a portion of that LNG will land in America.

At the same time, the U.S. domestic gas picture is changing. The construction of the Rockies Express pipeline is creating pressure in Midcontinent markets, and gas is pouring from such onshore shale plays as the Barnett, Fayetteville and Haynesville. Petrie expects the industry will see rotating basis blowouts in regions that have never experienced that particular twist before.

So, natural gas prices will be stressed for some time. “We’re now in a period of meaningful and potentially prolonged oil- and gas-price retrenchment,” said Petrie. A recovery is more likely in 2010 than this year, he concluded. 

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

Contact me at pwilliams@hartenergy.com

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