HNG’s Houston Energy News

Volume 1, Issue 1 June 23, 2010

A CONTRARIAN MAKES ANOTHER CALL – THIS

TIME, NATURAL GAS

Long & Littell – doesn't No, his analysis (and

Special points of buy the prevailing wis- more than 50 years of
dom that New York experience) tells him
interest:
Mercantile Exchange that gas inventories
natural gas prices are are about to get a lot
 U. S.Natural Gas Pro-
dead in the water, tighter, that new sup-
duction to decrease
stuck around $4 to $5 plies are overstated,
 Canadian Natural Gas and that prices are
Production and im- headed north of $8 by
ports to decline A CONTRARIAN the end of summer.
MAKES ANOTHER Why is he so sure he's
 Month to Month
CALL – THIS TIME, got it right and most
production declines everyone else has it
expected to begin in NATURAL GAS wrong?
the 2nd Qtr 2010 Henry Groppe was a Because, he contends,
lonely voice when he
shale gas – the previ-
 EIA to use data from forecast the right oil
ously unattainable
lat 6-18 mos instead price. He’s now going
of last 2-7 yrs to esti- against the grain on an- source of vast gas sup-
mate production other fuel, David Parkin- (U.S.) per million Brit- plies that has been
son writes ish thermal units even unlocked by new high-
 50% of all gas pro- as demand recovers, tech horizontal drilling
duction from wells awash in supplies and advancements – is not
Mr. Groppe – the octo-
drilled in last 3 yrs— with much more on the the holy grail it's been
genarian patriarch of
1/3 from wells way. cracked up to be. Not
drilled in previous yr Texas petroleum in-
even close.
dustry analysts Groppe
 Shale gas only 6% of
national production,
despite accelerated
drilling

 70 % of all
electricity in “Everyone thinks Corp., where he's a is that shale gas de-
Texas is gen- [shale gas] is going to long-time consultant posits are a tiny part of
solve all of our prob- and is special adviser the North American
erated from lems. There are very to the nine-month-old production pool – and
natural gas optimistic estimates Middlefield Groppe they are already de-
about the economically Tactical Energy mutual pleting fast.
recoverable volumes of fund. Mr. Groppe says that
gas from this new re- “That's dominating while the average de-
source,” he said in an everyone's views about pletion rate in conven-
interview last week in the gas supply picture tional gas wells is
the Toronto offices of – that we're going to about 25 per cent (in
boutique fund manager be flooded with gas.” other words, if you
Middlefield Capital The reality, he argues, didn't drill at all for
 HNG’s Houston Energy News
new wells, production
would decline by a quar-
ter each year), shale gas
shows even more rapid
depletion – output tum-
bles, on average, 45 per
cent in the first year for
shale wells.
Drilling of shale plays has
recovered rapidly from
the slowdown during the
recession – indeed, the
count of active horizontal
drill rigs in the United
EIA Chart States has ramped up to
record levels – which,
because of the high ini-
tial production volumes
“ With Gas shale.”
Add to that the fact that
selling at 30— consumption continues to
grow as the economy
40% below
recovers, and he believes
replacement the glut in gas will prove
strikingly short-lived.
cost—How long “We think that we're now
having a continuous,
can it rapid decline of gas in
storage,” he says. “By
continue? “
summer, it could get to
be alarming.”
“We would expect gas
prices to get above $8 in
half of the year. By Octo-
ber, he was right again.
Now, he says, a slow-but
-gradual decline in North
American natural gas
reserves – regardless of
shale – means an aver-
Caption describing picture age price in the $8 range
or graphic. is inevitable to trigger
the “demand destruction”
necessary to keep the
supply-demand picture in
balance. Eventually, he
says, that price will creep
up toward $10 by the
Page 2
that are characteristic of of U.S. natural gas pro-
shale wells, has flooded duction.
the market with supplies In the other 94 per cent
and fuelled expectations – conventional gas – the
of continued rapid rig count is 70 per cent
growth. But given Mr. below the pre-financial-
Groppe's depletion num- crisis levels of Septem-
bers, the high drilling ber, 2008, as low prices
pace may also be serving and high inventory levels
to drain the resource in have convinced produc-
the major shale pools ers to keep drills idled.
even faster than they “With that extraordinary
would otherwise. drop in drilling, the
As for the shorter-term [production] decline rate
supply picture, Mr. from all these [non-
Groppe notes that for all shale] sources is acceler-
that horizontal drilling ating – and will be much
frenzy, shale gas ac- more than offset what-
counts for just 6 per cent ever increases you get in
the August-September dipped to barely above
range.” $10 and some prognosti-
Why should we believe cators were hailing a new
Henry Groppe? Well, he era of cheap energy, Mr.
has a habit of disagree- Groppe said oil was set to
ing with the consensus soar. By early 2000, it
view – and being right. had topped $30 a barrel.
In 1980, when oil ap- And two years ago, when
proached $40 a barrel it threatened to reach
and forecasters predicted $150 a barrel and fore-
$100 oil was inevitable, casters said $200 and
Mr. Groppe said crude more were just over the
would fall below $15 by horizon, Mr. Groppe pre-
the mid-1980s. It did. dicted we'd be back at
In 1998, when crude $60-$70 in the second
end of the decade, as North American natural
gas production slowly gas supplies.
depletes. “When you take apart all
Mr. Groppe credits his the pieces from the bot-
successes on a meticu- tom, there's absolutely
lous study of supply-and- no way for that to take
demand details – some- place,” he says. “We
thing, he says, many of don't think any of them
the people who disagree have done a detailed dis-
with him fail to do. He section of what's going
believes this is again the on.”
case in his critics' mis-
placed faith that shale
plays will permanently
alter the trajectory of
Volume 1, Issue 1
The Statistics Support Groppe’s Assumptions
Looking at the charts on
page s2 and 3, the changes
outlined in Groppe’s asser-
tions seem to be accurate.
Those of us familiar with the
gas industry and the drilling
cycles understand that the
macro fundamentals do not
change over time. The real
question of gas depletion, is
not if, but when. Most shale
drilling is now occurring due
to large commitments dur-
ing the leasing frenzy of the
last few years coupled with
hedging strategies to make
these programs economic.
When those programs and
the attendant commitments
are gone and fulfilled, it is
The size of the average well has continually dropped since 1970
Inside Story Headline
Page 3
anybodies guess what the
timing will be, but not the
direction of pricing. The key
to natural gas pricing has
always been deliverability,
not the amount of calculated
reserves in the ground.
As Groppe notes: “ We
think that we're now hav-
ing a continuous, rapid
decline of gas in storage.
By summer, it could get to
be alarming.”
“Natural gas. Greatly
undervalued in terms of
fundamentals. Peaked in
the US 40 years ago and
will inexorably decline
long-term. Increasing use
and current prices would
create 8 billion foot a day
and gas prices would
have to almost double.
Recent shale gas diver-
sion is only about 13% of
total gas supply and of
that, 60% is Barnett shale
that peaked a year ago
and is in significant de-
cline”.
For Questions Contact:
Bill Thomas, President and C.E.O.

Comprised of unique
HNG Energy, L.L.C. backgrounds in Energy
2500 West Loop South
Suite 200
and financial services, the
Houston, TX 77027 principals of Houston
Phone: 713.623.5128
Natural Gas and HNG En-
Fax: 713.583.4466 ergy Companies (HNG)
E-mail: pricing@hngenergyllc.com have determined that a
new process for energy
marketing and related ser-
“Business Solutions for Texas Energy vices is needed for energy
Markets”
retailers and consumers
in the Texas Energy Mar-
ket. Our management
team combines the experi-
ences of executives and
an advisory board with
extensive backgrounds
and over 100 years com-
bined experience in man-
aging and developing suc-
cessful businesses within
the Energy industry.