No, his analysis (and more than 50 years ofexperience) tells him that gas inventories are about to get a lot tighter, that new sup- plies are overstated, and that prices are headed north of $8 by the end of summer. Why is he so sure he's got it right and most everyone else has it wrong? Because, he contends, shale gas – the previ- ously unattainable source of vast gas sup- plies that has been unlocked by new high- tech horizontal drilling advancements – is not the holy grail it's been cracked up to be. Not even close. A CONTRARIAN MAKES ANOTHERCALL–THIS TIME, NATURAL GAS Henry Groppe was a lonely voice when he forecast the right oil price. He’s now going against the grain on an- other fuel, David Parkin- son writes Mr. Groppe – the octo- genarian patriarch ofTexas petroleum in- dustry analysts Groppe Long & Littell – doesn't buy the prevailing wis- dom that New York Mercantile Exchange natural gas prices are dead in the water, stuck around $4 to $5 (U.S.) per million Brit- ish thermal units even as demand recovers, awash in supplies and with much more on the way. A CONTRARIAN MAKES ANOTHER CALL –THIS TIME, NATURAL GAS “Everyone thinks [shale gas] is going to solve all of our prob- lems. There are very optimistic estimates about the economically recoverable volumes ofgas from this new re- source,” he said in an interview last week in the Toronto offices ofboutique fund manager Middlefield Capital Corp., where he's a long-time consultant and is special adviser to the nine-month-old Middlefield Groppe Tactical Energy mutual fund. “That's dominating everyone's views about the gas supply picture – that we're going to be flooded with gas.”The reality, he argues, is that shale gas de- posits are a tiny part ofthe North American production pool – and they are already de- pleting fast. Mr. Groppe says that while the average de- pletion rate in conven- tional gas wells is about 25 per cent (in other words, if you didn't drill at all for HNG’s Houston Energy News June 23, 2010 Volume 1, Issue 1 Special points of interest: U. S.Natural Gas Pro- duction to decrease Canadian Natural Gas Production and im- ports to decline Month to Month production declines expected to begin in the 2nd Qtr 2010 EIA to use data from lat 6-18 mos instead of last 2-7 yrs to esti- mate production 50% of all gas pro- duction from wells drilled in last 3 yrs — 1/3 from wells drilled in previous yr Shale gas only 6% ofnational production, despite accelerated drilling 70 % of all electricity in Texas is gen- erated from natural gas
No, his analysis (andmore than 50 years of experience) tells himthat gas inventoriesare about to get a lot
tighter, that new sup-plies are overstated,and that prices areheaded north of $8 bythe end of summer.Why is he so sure he'sgot it right and mosteveryone else has itwrong?Because, he contends,shale gas – the previ-ously unattainablesource of vast gas sup-plies that has been
unlocked by new high-tech horizontal drillingadvancements – is notthe holy grail it's beencracked up to be. Noteven close.
A CONTRARIAN
MAKES ANOTHER CALL – THIS TIME,
NATURAL GASHenry Groppe was alonely voice when heforecast the right oilprice. He’s now goingagainst the grain on an-
other fuel, David Parkin-
son writes
Mr. Groppe – the octo-genarian patriarch of Texas petroleum in-dustry analysts Groppe
Long & Littell – doesn'tbuy the prevailing wis-dom that New YorkMercantile Exchangenatural gas prices are
dead in the water,stuck around $4 to $5
(U.S.) per million Brit-
ish thermal units evenas demand recovers,awash in supplies andwith much more on theway.
A CONTRARIAN MAKES ANOTHER CALL – THISTIME, NATURAL GAS
“Everyone thinks
[shale gas] is going tosolve all of our prob-lems. There are veryoptimistic estimatesabout the economicallyrecoverable volumes of gas from this new re-source,” he said in aninterview last week inthe Toronto offices of boutique fund managerMiddlefield Capital
Corp., where he's a
long-time consultantand is special adviserto the nine-month-oldMiddlefield GroppeTactical Energy mutualfund. “That's dominatingeveryone's views aboutthe gas supply picture– that we're going tobe flooded with gas.” The reality, he argues,
is that shale gas de-
posits are a tiny part of the North Americanproduction pool – andthey are already de-pleting fast.Mr. Groppe says thatwhile the average de-pletion rate in conven-tional gas wells isabout 25 per cent (inother words, if youdidn't drill at all for
new wells, productionwould decline by a quar-ter each year), shale gasshows even more rapid
depletion – output tum-bles, on average, 45 percent in the first year forshale wells.
Drilling of shale plays hasrecovered rapidly fromthe slowdown during therecession – indeed, thecount of active horizontaldrill rigs in the UnitedStates has ramped up torecord levels – which,because of the high ini-
tial production volumes
that are characteristic of shale wells, has floodedthe market with suppliesand fuelled expectations
of continued rapidgrowth. But given Mr.Groppe's depletion num-bers, the high drillingpace may also be servingto drain the resource inthe major shale poolseven faster than theywould otherwise.As for the shorter-termsupply picture, Mr.Groppe notes that for allthat horizontal drillingfrenzy, shale gas ac-
counts for just 6 per cent
of U.S. natural gas pro-duction.In the other 94 per cent– conventional gas – the
rig count is 70 per centbelow the pre-financial-crisis levels of Septem-ber, 2008, as low pricesand high inventory levelshave convinced produc-ers to keep drills idled. “With that extraordinarydrop in drilling, the[production] decline ratefrom all these [non-shale] sources is acceler-ating – and will be muchmore than offset what-
ever increases you get in
end of the decade, asgas production slowlydepletes.Mr. Groppe credits hissuccesses on a meticu-
lous study of supply-and-demand details – some-thing, he says, many of the people who disagreewith him fail to do. Hebelieves this is again thecase in his critics' mis-placed faith that shaleplays will permanentlyalter the trajectory of
half of the year. By Octo-ber, he was right again.Now, he says, a slow-but-gradual decline in NorthAmerican natural gas
reserves – regardless of shale – means an aver-age price in the $8 rangeis inevitable to triggerthe “demand destruction” necessary to keep thesupply-demand picture inbalance. Eventually, hesays, that price will creepup toward $10 by the
North American naturalgas supplies. “When you take apart allthe pieces from the bot-tom, there's absolutely
no way for that to takeplace,” he says. “Wedon't think any of themhave done a detailed dis-section of what's goingon.”
the August-Septemberrange.” Why should we believeHenry Groppe? Well, hehas a habit of disagree-
ing with the consensusview – and being right.In 1980, when oil ap-
proached $40 a barreland forecasters predicted$100 oil was inevitable,Mr. Groppe said crudewould fall below $15 bythe mid-1980s. It did.In 1998, when crude
dipped to barely above$10 and some prognosti-cators were hailing a newera of cheap energy, Mr.Groppe said oil was set to
soar. By early 2000, ithad topped $30 a barrel.And two years ago, when
it threatened to reach$150 a barrel and fore-casters said $200 andmore were just over thehorizon, Mr. Groppe pre-dicted we'd be back at$60-$70 in the second
shale.” Add to that the fact thatconsumption continues togrow as the economyrecovers, and he believes
the glut in gas will provestrikingly short-lived. “We think that we're now
having a continuous,rapid decline of gas instorage,” he says. “Bysummer, it could get tobe alarming.” “We would expect gasprices to get above $8 in
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