McMoran Exploration found the combination to unlock Davy Jones locker and release billions of feet of natural gas. We may not need it today but eventually we will be happy about the discovery.
When McMoran knocked on the door of Davy Jones locker they were not sure what they would find. What they did find was one of the largest discoveries of natural gas in the Gulf in decades. Obviously that sounds good in print but in reality it will take several more very expensive exploratory wells to really define how large the discovery really is.
Strangely the well is in only 20-feet of water in an area that had been heavily explored. They just did not explore deep enough to find the deposits. McMoran said they found 135 feet of net pay at a depth of more than 28,000 feet. They said tests suggest there may be even more gas even deeper than the current Davy Jones discovery.
Gas production in the gulf basin is roughly 7 BCF per day. That is only half of the production rate in 2001.
McMoran said initial production from the well had been scheduled for 2017 but based on the size of the find they were going to accelerate that to 2014.
The exploration business is either feast of famine. A year ago gas was more than double what it is today but the production from all the shale plays has created a temporary glut of gas. So much of a glut there are over 1500 wells in the Barnett Shale in Texas that have not been completed. Drillers are punching the holes but waiting to spend money on the completion of the well until gas prices increase.
Gas prices in 2008 hit a seven-year low due to increasing supplies and declining demand. The decline in demand is primarily from U.S. manufacturing businesses that are running well below capacity and are not using gas to heat or cool or as feedstocks for their products. Natural gas is a feedstock for things like paint, fertilizer, plastics and hundreds of other products.
Gas prices are currently about $5.50 per MCF and border line for many gas producers. If it falls much below $5 those producers have to curtail production rather than sell it for less than cost. Gas in storage built to record levels ahead of winter and the cold weather in early January prompted one of the biggest draws from stocks in recent memory of -266 BCF for one week. Despite the draw there is plenty of inventory remaining and we could probably spend the last two months of winter below freezing and not really produce a big dent.
The problem with shale gas is the rapid decline cycle. We have a surplus today but two years from now we may be back in shortage mode. However, Baker Hughes has been posting a weekly increase in rigs for about the last 12 weeks and most of those rigs are going back to work to drill for gas. There is a long startup cycle and gas they find today probably won't be available commercially for 18-24 months unless the fields already have infrastructure in place like processing stations and pipeline connections. Just punching the hole is the easy part.
I keep hearing about the coming rally in natural gas stocks and I don't see it. Winter is coming to a close and demand will decline again and push prices lower. That will slowdown the current rig restart cycle and cause more problems for drillers. I would like to believe there is a rally in their future but I think it happened over the last four weeks after Exxon bought XTO. Stocks rallied on the possible consolidation in the sector but are starting to weaken again with no further news.
I would be careful investing in the gas sector until prices for the commodity actually firm on increased demand rather than voluntary curtailment.