Texas Natural Gas Lease Sales Price Down

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By ALAN SAYRE (AP) – 1 day ago

NEW ORLEANS — With natural gas prices down two-thirds or more from a year ago and supplies backlogged, interest in Texas offshore leases has dropped.

The Minerals Management Service said Tuesday that 26 companies submitted 189 bids on 162 federal tracts — down sharply from last year's western Gulf of Mexico sale that attracted 423 bids from 53 companies on 319 tracts. The bids will be opened Wednesday in New Orleans.

Unlike the much-bigger annual central Gulf sale of leases off coastal Louisiana, Mississippi and Alabama — which is oil dominated — the Texas coastal sale is centered on natural gas.

This year's central Gulf sale saw winning bids for drilling rights drop more than 80 percent to $703 million, compared with $3.67 billion in 2007 when oil prices were pushing $100 per barrel.

Analysts said the pre-sale figures are another sign of how energy markets have changed since the recession pulled the plug on sky-high prices of 2008.

A year ago, gas was trading at around $9.50 per thousand cubic feet — compared with about $3.10 currently. In the meantime, sharp drops in industrial demand, especially in the high-using industries of steel and chemical manufacturing, have resulted in a supply backlog of about 500 billion cubic feet, said Stephen Schork, an independent energy trader and analyst based in Villanova, Pa.

Schork said a telling sign of the natural gas bear market was seen after September 2008's hurricanes Gustav and Ike followed paths through the offshore oil and gas production zone similar to Katrina and Rita in 2005. But unlike 2005, energy prices didn't spike.

Last year's storms "did not stem the freefall in prices," Schork said. "We're a year beyond that and supplies have continued to grow and prices have continued to fall."

Phil Flynn, energy analyst with Chicago-based PFGBest Research, said demand is low, supplies are strong and there is little capital for drilling projects that typically cost hundreds of millions of dollars. "There's just not a lot of incentives to make these bets," he said.

Flynn said only an economic turnaround can change the market.

He said major finds in onshore shale formations may shift the gas market's emphasis away from offshore drilling in the long term.

"It's a new world," he said. "We may be getting into a situation where we were years ago where the natural gas market is a very steady situation.

"We may have supplies now to last us for generations," Flynn said.

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