One false move could send natural gas prices tumbling, again.
Of course, I'm referring to the dangerous game that companies are playing with the glut in natural gas.
Think about it.
Every time a natural gas recovery appears on the horizon, our hopes are dashed by another round of bullish supply news.
And it's a dangerous game that producers are playing.
Within the last two years, how many times have you seen a positive outlook for North American natural gas production. Trust me, you'll run out of fingers and toes by the time you're done counting. Despite the supply glut dragging prices in the dirt, there's a good chance you've taken advantage of the situation, using a little unconventional wisdom for your natural gas investments.
After all, we've seen the U.S. shale basins come alive. If it wasn't for the massive supply glut, all of my readers would have retired by now.
Feeding the Natural Gas Glut
Total SA, a French oil company, recently got the green light from the UK government to develop two natural gas fields to the west of the Shetland islands.
The company is planning to spend approximately $3.8 billion USD to develop the Laggan and Tormore gas fields. According to the March news release, the fields hold 230 million boe of reserves.
Sounds simple, right?
Unfortunately, it's not as easy as it sounds.
Drilling in the waters of the North Sea is difficult, mostly due to the volatile weather. With natural gas prices in the trenches, Total is obviously making a long term bet with the Shetland gas fields.
Here's a few reasons the gas fields off the west coast of the Shetland Islands isn't my kind of natural gas bet:
- The UK gets most of its gas from the hazardous waters of the North Sea.
- Natural gas production in the North Sea peaked ten years ago. There's only one direction it'll go from here.
- Last year, BP predicted its production output in the North Sea will declince by 9%.
- If oil prices drop, so will North Sea drilling activity.
Then again, they don't have a choice in the matter. Even though the company planned to start work as soon as possible, they won't see one cubic foot of production for another four years at the very least.
Total's Shetland gas gamble could play out well for them. Personally, I think there's a much better way to play natural gas in the long run. Once prices recover within the next year or two, we know those shale plays will be even more profitable.
Tomorrow, I want to show you how the major oil companies are grabbing as many shale assets as they can get their hands on. The interesting part, however, is that we beat them to the punch. Moreover, we'll talk about the reason why a natural gas comeback is inevitable.
Stay tuned.
Until next time,
Keith Kohl
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I always read your (and your colleagues') articles with great interest. It's a great way of seeing the world beyond process simulations, wall thickness calculations and the like, which I am working on for my thesis project. (I am a student of Delft University, finnishing my MSc. degree in Offshore Engineering, around the topic of subsea gas processing and treatment.)
As I've looked at offshore gas developments around for my literature work, I can tell you that they are a bit different w.r.t US gas developments. A few reasons: the US is not (yet) out of gas. The UK almost is, and would be without big projects like Ormen Lange. So to develop it's 'own' (harsh and difficult) fields is only logical in terms of security of supply. And let's not forget: dwindling domestic production also reflects in the states income, which is roughly 50% of the brute revenue of any produced field. So yes, it's only logical that domestic the fields are being developed.
Then, for Total SA/Dong EP (80/20 shareholder, respectively) this is a nice if challenging project. Nice in terms of an existing infrastructure (Frigg pipe) and a ensured consumption. Nice in terms of an 80% share for Total (unprecedented for an IOC to own such a large share in a north sea developed field imo). So yes they are taking a big risk but also a (in the long run) a good revenue prospect. This may not give rise to exploding stock values, but should provide long term value. This is backed by the fact that shale gas field offshore have not been developed to my knowledge, rendering the comparison useless (at least from an engineering point of view).
To conclude: yes, Total made a wise decision on the Laggan/Tormore fields in terms of european development. No it's not a share expected to boom, but will keep it's value much much longer with projects like these. So pending on your investment strategy, you may conclude if its wise or not.
kr,
Wouter