Natural gas under Gulf may be too much of a good thing

by Brett Clanton

The prospect of yet another new frontier for US natural gas development, this time in super-deep wells beneath the Gulf of Mexico's shallow waters, is not all good news for Houston's energy sector.
A big uptick in output from the emerging region -- predicted after announcement of a major discovery there -- would clearly signal new life for the heavily explored offshore region. But it could also boost already swollen US gas supplies, weaken prices and keep producers on the sidelines.

Such a scenario is unlikely to play out in the next year or two, given the time needed to develop the complex wells. But within three to five years, if output materializes and gas from other sources keeps rising, it "adds one more brick to the natural gas wall of worry," said David Pursell, a managing director with local investment bank Tudor, Pickering, Holt & Co. Securities.
"It could be meaningful to US supply in a time frame when we really don't need more additions to supply," he said.

A team led by New Orleans' McMoRan Exploration said it made one of the biggest discoveries in the Gulf's shallow waters in decades. The claim was based on results from a well, drilled in 20 feet of water to a depth of more than 28,000 feet that found a 135-foot column of petroleum-rich rock at the Davy Jones prospect. Additional drilling will be needed to confirm the well's true potential, but the team said the early results suggest, even beyond Davy Jones, there is plenty more oil and gas to be found in the deeply buried layers of sediment.
"Go back through the history of development in our business, and odds are, we've got more than one of these in front of us," said John Schiller, CEO of Energy XXI, a Hamilton, Bermuda-based firm run from Houston that has a 16 % stake in the project.

Industry analysts had predicted that ultradeep gas plays in the shallow-water Gulf of Mexico would contribute to US natural gas supplies over time. But the Davy Jones discovery is likely to accelerate activity in theregion.
Matt Snyder, lead analyst for Gulf of Mexico research at consulting firm Wood Mackenzie, had projected commercial production from the wells by 2017. Now, in light of the announcement, he said the firm will likely revise its forecast to 2014. The additional output could help arrest steep declines in natural gas production in the Gulf of Mexico in recent years. Gas production from the basin today is roughly 7 bn cf per day, about half what it was in 2001.

Good for consumers
A rise in supply also might be good for American consumers and industrial users who could see their energy costs fall. About a quarter of the energy consumed in the US is natural gas. Residential customers use it to heat homes and to fuel stoves, water heaters and other household appliances. Industrial customers use it as a raw material in paints, fertilizer, plastics and many other everyday products.
But some oil and gas producers could struggle if the added output comes on top of growing stockpiles of natural gas from shale rock formations and other unconventional sources that have recently exploded. Imports of liquefied natural gas, or LNG, are also seen rising as new projects come online around the world, threatening to drive supplies still higher.

Careful what you wish for
"We've found ourselves in the past few years, thinking, be careful what you wish for because it might come true. All the sudden we have gas everywhere now," said Tyler Priest, director of global studies at the University of Houston's Bauer College of Business.
Last year, natural gas prices hit a seven-year low as a jump in US production met with a severe recession that gutted demand and pushed domestic stockpiles to an all-time high. Inventories remain bloated today, but prices recently rebounded to their highest point in a year, lifted by the improving economy and a cold winter that has boosted use of natural gas for heating. In 2008, the United States used 23.8 tcf of natural gas, matching the record high set in 2000. Domestic gas production that year reached nearly 21 tcf, with imports meeting the balance of demand, according to Energy Department data. But the Energy Department projects US consumption will rise to about 26 tcf by 2030.

Analysts with Jefferies Research estimated the Davy Jones discovery could contain some 2 tcf of natural gas. Partners in the project said the formation may even hold triple that, as well as other hydrocarbons. And they said it verified the presence of a major new exploration frontier that could yield much more oil and natural gas in coming years.
"It remains to be seen what this is going to do to total gas supply, but I would say it's pretty rare that you find one discovery by itself without other finds nearby," said Matt Pickard, market analyst with Quest Offshore Resources in Sugar Land.

"You'll see it coming"
But Pursell, of Tudor, Pickering, Holt, cautioned that there is still much work to do to determine the potential of Davy Jones and other ultra-deep gas wells inthe Gulf's shallow waters.
"Before it becomes a big add to US gas supply, you'll see it coming," he said. "These wells take a long time to drill and cost a lot of money. They're not going to sneak up on anybody."