Bad Gulf Weather Means Higher Natural Gas Price

Natural gas futures jumped to a two- week high after the National Hurricane Center said a tropical depression may intensify, threatening gas and oil production in the Gulf of Mexico.

Tropical storm warnings have been posted in the Bahamas and South Florida. Gas supplies rose 51 billion cubic feet last week, below the five-year average gain of 64 billion, an Energy Department report today showed. Analysts surveyed by Bloomberg expected an increase of 50 billion, and a separate survey of Bloomberg users showed an increase of 51 billion.

“People are watching that storm like a hawk,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It’s keeping a little bit of a fear premium in gas right now.”

Natural gas for August delivery rose 10.5 cents, or 2.3 percent, to $4.618 per million British thermal units at 1:22 p.m. on the New York Mercantile Exchange. Prices touched $4.719, the highest level since July 7.

The stockpile total of 2.891 trillion cubic feet was 9.9 percent higher than the five-year average, narrower than a 10.7 percent gap the previous week, department data showed. The deficit to year-earlier supplies widened to 1.8 percent from 1.1 percent.

A tropical depression has formed in the Atlantic about 405 miles (652 kilometers) east-southeast of Key Largo, Florida, according to a statement released by the National Hurricane Center at 11 a.m. in Miami.

Storm Forecast

The depression, with maximum sustained winds of 35 miles per hour (56 kph), may become a tropical storm later today, the center said. The next Atlantic storm will be named Bonnie.

This hurricane season, estimated by the government to be the most active since 2005, may cut gas production in the Gulf of Mexico by 166 billion cubic feet through November, according to Energy Department estimates released on July 7.

Hurricane Alex, the earliest Atlantic hurricane since 1995, cut off as much as 919 million cubic feet of daily production last month in the Gulf of Mexico, about 15 percent of regional output, before it came ashore in Mexico.

“We’re less dependent on the Gulf of Mexico production” than we used to be, said Phil Flynn, vice president of research at PFGBest in Chicago. “But, obviously, if you’re going take 11 percent of domestic production offline, we could start to see that pad we have start to dwindle.”

Temperatures in the U.S. East Coast and Midwest will be above normal from July 27 to July 31, according to the National Weather Service.

New York will have a high of 95 degrees Fahrenheit (35 Celsius) on July 24, 10 degrees above average, according to AccuWeather Inc. Chicago’s temperature is forecast to hit 91.

About 23 percent of electricity is generated using natural gas, according to the Energy Department.

Hotter Weather

Cooling requirements in the U.S. will be 24 percent higher than normal from tomorrow through July 29, according to Weather Derivatives of Belton, Missouri.

“Given the recent extraordinarily hot weather, you’re getting injections that are quite small,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. “The market implication is, could this persist for a number of weeks and affect overall storage level going into the fall?”

Stockpiles may rise to 3.81 trillion cubic feet by the end of October, close to a record 3.837 trillion last November, the Energy Department’s Short-Term Energy Outlook on July 7 showed.

To contact the reporters on this story: Moming Zhou in New York at Mzhou29@bloomberg.net;Noah Buhayar in New York at buhayar@bloomberg.net

BP Sells Apache Gas and Oil Assets for $7 Billion US Dollars

The Gulf of Mexico oil spill washed ashore in Alberta on Tuesday after Apache Corp. snapped up BP's western Canadian natural gas operations as part of a $7-billion US asset sale to raise cash to help pay for damages arising from the Gulf of Mexico oil spill.

Houston-based Apache will pay $3.25 billion US for the Canadian properties, which include Montney and unconventional gas plays in Alberta and northeastern British Columbia.

The move will boost Apache's production by 66 per cent, further cementing its position as one of Canada's largest natural gas producers.

The deal is the biggest since Chinese refining giant Sinopec bought ConocoPhillips' nine per cent stake in Syncrude Canada for $4.65 billion US this year.

"Most of the acquisitions of this size have been corporate acquisitions rather than asset transactions," said Michael Tims, chairman of Peters & Co.

"As I read it, it doesn't quite double Apache, but it makes a pretty significant impact. That's a significant lift to their Canadian operations."

The sale does not include the British oil major's oilsands division, which comprises a joint venture with Husky Energy, the Terre de Grace project with Value Creation Inc. and a project with Devon Canada to develop the Kirby project.

Nor does it include the company's natural gas liquids and marketing businesses in Alberta, or exploration leases in the Beaufort Sea.

Apache CEO Steven Farris said the Canadian assets were the cream of the deal, dovetailing with its existing unconventional gas assets and its emerging Horn River properties.

"I didn't anticipate this one. If it hadn't been for the Gulf of Mexico incident . . . I'm sure we wouldn't be sitting here tonight," he said on a conference call.

It wasn't immediately clear if the deal will lead to layoffs, but Farris said the company will look to begin rationalizing its Canadian portfolio in early 2011. "We have an awful lot of smaller stuff in Alberta we'll probably decide don't fit our portfolio anymore," he said.

BP Canada spokeswoman Hejdi Feick said a little less than half of the company's Canadian workforce, or 520 of 1,300 people, will be directly affected by the deal. She said it's not clear how many will be going over to Apache.

"It's up to Apache who they decide to take, but certainly we see that the assets are valuable because of the people that know them and run them," she said.

BP said the sale is part of an effort to raise $10 billion to raise money to help pay for the oil spill in the Gulf of Mexico, which has cost the company almost $4 billion since the explosion of the Deepwater Horizon and ensuing underwater rupture on April 27.

The company has set aside $20 billion to help pay for the leak and has slashed its dividend. BP said there could be more sales to follow.

"Over the last two months, the board has considered BP's options for generating the cash necessary to meet the obligations likely to arise from the Gulf of Mexico oil spill," BP said in a statement. "The board believes that there are opportunities to divest assets which are strategically more valuable to other parties than they are to BP."

Apache will also buy nearly all of BP's operations in Egypt and the Permian Basin in Texas and New Mexico under the agreement announced Tuesday.

Apache officials said the deal adds about 66 per cent to the company's Canadian production of 340 million cubic feet per day in the second quarter, taking it to 117,000 barrels of oil equivalent per day.

BP's Canadian assets are currently producing 240 million cubic feet of gas and 6,500 barrels of liquids per day, with 214 million barrels oil equivalent of net proved reserves and 1.37 billion barrels of oil equivalent of net resources associated with 525,000 hectares of undeveloped land.

Prior to the deal, Apache was already one of Canada's largest natural gas producers and has grown its Canadian presence through a series of blockbuster acquisitions over the past decade. In 1999, it paid $518 million for Shell Canada's conventional oil and gas unit and followed that up with the $677-million acquisition of Fletcher Challenge Canada in 2001.

BP had recently begun commissioning the $1.4-billion Noel tight gas play in northeast B.C. and Farris said Apache acquires a substantially completed project. He estimated the company will spend about $300 million to put the finishing touches on what was a BP Canada showcase and the fist zero-emissions gas project in Western Canada.

spolczer@theherald.canwest.com

Alaskan Pipeline Project Still in the Dark

By BECKY BOHRER (AP) – 2 hours ago

JUNEAU, Alaska — The federal coordinator for Alaska natural gas projects said Tuesday it could be be late this year, or early next, before Alaskans know whether they're closer to securing a major natural gas pipeline.

Larry Persily said Tuesday that the public shouldn't expect any major announcements next week, when TransCanada Corp. is slated to end its three-month process of courting gas producers and securing commitments for shipping deals. He said the end of the open season will simply mark the start of negotiations between the company and potential shippers, with possible issues such as gas volume commitments, years of expected use and what a shipper wants to pay needing to be ironed out.

Once a deal is reached, the developer and shipper sign a precedent agreement, and Persily said those commitments help provide the basis for the developer beginning to spend hundreds of millions toward building a line.

All of this, of course, assumes there are bidders; the goal of an open season is to gauge interest in building a major line.

Persily said the odds for a pipeline would increase if federal legislation moves forward that pushes the nation toward greater use of natural gas.

"The hope for an Alaska gas pipeline rests on whether the market needs our gas. It's just that simple," he told reporters during an informal briefing in Anchorage. Underpinning that demand growth will be large volume, long-term users like electricity companies, not scattered individual users.

If the U.S. turns to natural gas as primary fuel for new power plants and moves away from coal plants that can be expensive to retrofit to meet changing emissions standards, "we've got a chance, I believe, for this project," Persily said.

He said federal legislation encouraging cleaner energy would help.

"I think Alaskans, while they're waiting for the results of the open season, need to think that reasonable climate change legislation really can be good for a North Slope pipeline," he said.

There are currently two competing projects vying for attention that would bring gas from Alaska's prodigous North Slope to market, and it's widely believed that only one will go forward, if, any go forward at all.

TransCanada is working with Exxon Mobil Corp. to advance its project. It's moving forward with the promise of up to $500 million from the state under an exclusive license it won under the Alaska Gasline Inducement Act, championed by then-Gov. Sarah Palin as a way to bring to fruition the long-hoped for natural gas line.

The second project, Denali-The Alaska Gas Pipeline, is a joint effort of BP America and ConocoPhillips. It began its open season earlier this month, with a run slated to end Oct. 4.

Based on the developers' own timelines, which are subject to change, and the signing of any precedent agreements, it could be late this year or early next until it's known whether Alaska is any closer to securing a line, Persily said.

That timeline puts it past the November election.

The pipeline — and questions of how best to bring gas to market — has become a major issue among the Republican candidates for governor. Gov. Sean Parnell has remained committed to the process he inherited when Palin resigned last year. Two high-profile challengers, Ralph Samuels and Bill Walker, believe this is a wrong-headed approach.

Copyright © 2010 The Associated Press. All rights reserved.

UK and US Leaders to Discuss BP Future

U.K. Prime Minister David Cameron will meet Barack Obama in Washington tomorrow, using his first trip to the U.S. as British leader to quell criticism of BP Plc.

Cameron, who met BP Chairman Carl-Henric Svanberg July 16, indicated he’ll tell Obama that London-based BP, Europe’s second-largest energy company by market value, needs to survive if it’s to make good on its promise to compensate victims of the Gulf of Mexico oil spill.

“It’s important at the end of the day that we have a strong and stable company that’s able to survive,” Cameron told a public meeting July 16 in Luton, near London. “Not least so they can pay compensation.”

As BP sealed the leak last week, a U.S. senate probe suggested there were links between BP’s interests and the 2009 release of Lockerbie bomber Abdel Basset Al-Megrahi, risking further damage to the company. While Cameron’s spokesman Steve Field said yesterday he didn’t expect that to be “a major issue” for the leaders, Britain has raised the issue with the U.S. at least three times in the past four days.

Foreign Secretary William Hague wrote Secretary of State Hillary Clinton on July 17, saying there was no evidence BP was involved in the release. He also spoke to her by phone about it July 16. The previous day, Ambassador to the U.S. Nigel Sheinwald wrote Senator John Kerry, whose Foreign Relations Committee is holding a hearing on the matter. He said “inaccuracies” about the Lockerbie bomber were “harmful to the U.K.”

‘Personal Relationship’

Field said Cameron wants to “build his personal relationship” with Obama. The prime minister last week set out how he sees Britain’s relationship with America, offering the U.K. as a “junior partner.” He’s previously said he wants to focus on diplomacy beyond the U.S., pointing to India as a potential partner. That’s a shift from the stance of his predecessors Tony Blair and Gordon Brown, who sought to show their closeness to the White House.

“This is the most difficult part of the dance that’s coming up,” said Robin Niblett, director of London-based foreign affairs institute Chatham House. “He wants to say he’s more unsentimental about this relationship than his predecessors It’s fairly easy to say that when you’re at home, but when you get there, how do you say it to your host, who’s going to be very important to you in the coming years?”

The row over Lockerbie follows Obama’s criticism of BP over the Gulf of Mexico oil leak. Shares of BP have dropped 36 percent this year as the company fought the biggest spill in U.S. history. The stock on Friday rose 1.3 percent in London trading after the company said it stopped the flow of oil for the first time it rupture in April.

Meghari Remains Alive

Megrahi was freed by Scotland, which has an independent justice system, on compassionate grounds in August because he was dying of cancer. He remains alive. The Libyan was jailed in 2001 for the 1988 killing of 270 people in the bombing of Pan Am Flight 103 over the Scottish town of Lockerbie.

The U.S. Senate Foreign Relations Committee said last week it will hold a hearing on July 29 into the circumstances of Megrahi’s release. Senator Robert Menendez, a New Jersey Democrat, said the panel will ask BP officials to testify. BP signed an exploration agreement with Libya’s National Oil Corp. in May 2007 during a visit by then Prime Minister Tony Blair.

“There is no evidence that corroborates in any way the allegations of BP involvement in the Scottish Executive’s decision to release Megrahi on compassionate grounds in 2009,” Hague wrote to Clinton. “Nor any suggestion that the Scottish Executive decided to release Megrahi in order to facilitate oil deals for BP.”

‘Repulsed’

At the time of Megrahi’s release, Prime Minister Gordon Brown said he couldn’t intervene in Scotland’s decision. Afterward, he said he had been “repulsed” by the hero’s welcome Megrahi was given on his return to Libya. His government later said it had supported the release on diplomatic grounds, while insisting it hadn’t been involved in the decision.

Cameron, who replaced Brown in May, opposed the release at the time, a point Hague made in his letter to Clinton.

The prime minister and Obama will meet one-on-one in the White House before being joined by officials for a working lunch. Cameron will later have meetings in Congress. On Wednesday he’ll visit the Pentagon for a briefing on Afghanistan.

U.K. Defence Secretary Liam Fox yesterday told the British Broadcasting Corp. that the prime minister’s goal of withdrawing British combat troops from the country by 2015 was “quite conservative.” Britain is increasing its aid package to the country with the aim of increasing stability.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net

U.S. Rig Count by 4 According to Baker Hughes

NEW YORK (Dow Jones)--The number of rigs drilling for natural gas in the U.S. climbed this week, buoyed by relatively high prices for the fuel, while the oil rig count slipped.

The number of oil and gas rigs climbed to 1,571, up 4 rigs from the previous week, according to data from oil-field services company Baker Hughes Inc. (BHI). The number of gas rigs was 979, an increase of 15 rigs from last week, while the oil rig count was 580, a decline of 12 rigs. The number of miscellaneous rigs increased by one to 12 rigs.

The number of gas rigs in use peaked at 1,606 in September 2008. Producers subsequently reduced drilling activity sharply in response to low prices, but the rig count has stabilized in recent weeks as hot weather and the start of hurricane season provide support for prices.

Gas supplies, however, remain ample. Gas in U.S. storage as of July 9 totaled 2.84 trillion cubic feet, about 10.7% above the five-year average for the same week and 1.1% below last year's level for that week.

Natural gas for August delivery on the New York Mercantile Exchange was recently down 9.4 cents, or 2.05%, at $4.492 a million British thermal units.

-By Christine Buurma, Dow Jones Newswires; 212-416-2143; christine.buurma@dowjones.com

Air Conditioners on Full Blast with Hot Weather

By SANDY SHORE (AP) – 1 day ago

Natural gas prices jumped Thursday as Americans cranked up air conditioners with hot weather gripping much of the country.

Natural gas rose 28 cents, or 6.5 percent, to settle at $4.586 per 1,000 cubic feet on the New York Mercantile Exchange. That's the highest settlement price for natural gas in two weeks.

Meanwhile at the gasoline pump, motorists across the country paid an average $2.718 for a gallon of regular unleaded, up 0.5 cent from Wednesday, according to AAA, Wright Express and Oil Price Information Service. That's about the same as a week ago and nearly 22 cents higher than a year ago.

The increase in natural gas prices came after the Energy Department's Energy Information Administration reported natural gas inventories held in underground storage in the lower 48 states increased by 78 billion cubic feet to 2.840 trillion cubic feet for the week ended July 9.

That was about 1.1 percent less than a year ago but 10.7 percent more than the five-year average of 2.566 trillion cubic feet.

Record heat in parts of the country increased electricity production by 8.7 percent this week from the same time a year ago, according to the Edison Electric Institute. In the past 52 weeks, electricity generation has risen just 0.3 percent from a year ago.

Some power plants use natural gas to run generators that produce electricity.

Natural gas prices have remained low because overall demand has been weak while stockpiles have risen amid consumer worries about high unemployment and the economic recovery.

Yet, analysts don't think lower prices necessarily will translate into lower heating costs this winter, noting that natural gas was even cheaper a year ago.

"I wouldn't expect utilities to start lowering natural gas prices," oil analyst and trader Stephen Schork said. "The economy from a jobs perspective, from a housing perspective, certainly hasn't rebounded but the industrial demand has rebounded so you do have greater demand."

Lind-Waldock senior market strategist Rich Ilczyszyn believes winter will bring higher prices for both consumers and traders as demand rises.

A forecast active hurricane season has yet to begin. If big storms do come, they could disrupt production in the Gulf of Mexico. Although onshore production would offset any hurricane-related delays, a disruption still would prompt many traders to take action, he said, and prices could rise.

Oil prices retreated on disappointing economic news. The Federal Reserve said industrial production inched up 0.1 percent last month, while regional index from New York and Philadelphia showed declines.

Benchmark crude lost 42 cents to settle at $76.62 a barrel.

In other Nymex trading heating oil fell 1.78 cents to settle at $2.0183 a gallon, and gasoline lost 0.58 cent to settle at $2.0347 a gallon.

Brent crude fell 58 cents to settle at $76.19 a barrel on the ICE futures exchange.

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Associated Press writers Natalie Ragus in London and Alex Kennedy in Singapore contributed to this report.

Copyright © 2010 The Associated Press. All rights reserved.

Natural Gas Supply is Enormous

By JOHN DEUTCH

Even energy experts tend to forget the enormous impact unanticipated events can have on markets and public policy. Today there are two developments that have the potential to cause dramatic change: the existence of enormous reserves of natural gas and the BP spill.

As recently as two years ago, we had no idea that there were vast natural gas resources in unconventional reservoirs like coal seams, tight sand and shales in the United States and elsewhere. That's the positive surprise. On the negative side, the severity of the oil spill in the Gulf of Mexico could well turn the global public against oil and natural gas exploration.

If the past is any guide, accidents in the energy sector profoundly affect this country's energy outlook. Reactor incidents at the nuclear power stations at Three Mile Island in Harrisburg, Pa., in 1979 and in Chernobyl, Ukraine, in 1986 interrupted nuclear power plant construction in the U.S. and Europe for two decades. The 1973 oil embargo by OPEC and the 1978-79 oil crisis caused by the fall of the Shah in Iran permanently changed expectations about the security of the oil supply and the long-term price trend.

The BP spill will certainly lead to a major review of the risks involved in offshore drilling. Re-examining operating practices and regulations will likely take more than a year, during which time new deepwater operations will be curtailed. The danger is that public attitudes and government policy will lead to an extended period of reduced investment and licensing.

Some observers will characterize the blowout as an exceptional case due to chance or negligence. Others will see it as evidence of general inattention. Few will recall the facilities in the Gulf survived Hurricane Katrina in 2006, an unusually stressing event, without appreciable problems.

Yet even as we endlessly debate U.S. energy and climate policy in the wake of the BP gusher, we aren't spending enough time considering what's on the horizon—particularly natural gas's transition from a dwindling to an abundant resource. According to the Energy Information Agency (EIA), natural gas could become a much more important fuel for the U.S. in the coming decades.

In its 2010 International Energy Outlook, the EIA predicts growth in natural gas production principally from shale in Latin America, China, Australia, North Africa and the former Soviet Union. Global unconventional gas production is projected to increase to 7.9 trillion cubic feet in 2035 (1/3 of total natural gas production) from its 2008 level of 3.5 trillion cubic feet (about 1/6 of total production). The 2010 EIA projection of world-wide production of unconventional gas increases at 5.2% per year between 2008 and 2035, compared to 1.4% for total gas production.

What will this mean? In the short run, natural gas will displace coal in the electricity sector. This will significantly lower carbon emissions. In terms of renewable energy, low-cost natural gas will make hybrid solar plants that use both sunlight and natural gas to make electricity more economically attractive.

As oil gets more expensive and natural gas cheaper, there will also be an enormous incentive to use far more natural gas in the transportation sector. Compressed natural gas can power buses, medium-duty trucks and light-duty vehicles that operate in urban environments close to fueling stations.

But the U.S. is far behind the rest of the world in using this source of energy for transportation. As of 2009, Pakistan led the world with 2.4 million vehicles fueled by compressed natural gas and over 3,000 fueling stations. By comparison, the U.S. had about 100,000 such vehicles and 1,300 stations, consuming 0.1% of the 12 million barrels of oil per day devoted to transportation.

The penetration of natural gas into the U.S. market will be determined by the cost of kits to convert gasoline-fueled vehicles to natural gas. That cost should decline sharply with scale, new vehicle offerings, the availability of fueling stations, and, of course, continuation of the favorable cost of natural gas compared to motor gasoline.

Even 10% penetration in the next decade or two would displace 1.2 million barrels of oil per day. This may not be decisive, but it certainly could have as big of an impact as other proposals to reduce import dependence, like gasohol (a mixture of motor gasoline and ethanol from corn).

Natural gas can also be transformed into liquid fuels, such as methanol, for transportation or industrial use at a production cost that I estimate to be approximately $45-$60 per barrel of product. This is expensive, but lower than the likely price of crude oil and the anticipated cost of synthetic liquids from coal or shale (plus it has less carbon emissions).

The continued expansion of gas pipelines around the world, as well as the expanding trade of liquefied natural gas, indicate a movement toward a global market for natural gas similar to oil, and ultimately with a single world price. A global price implies major changes in patterns of gas trade between the North American market, where gas is priced to coal, and the Asian market, where gas is priced to oil. Because coal is cheaper than oil on an energy efficient basis, this means that current natural gas prices in North America are $4 per thousand cubic feet compared to $10 per thousand cubic feet in Asia.

That's where things seem to be heading now, but our thinking should remain agile. There undoubtedly will be other energy surprises that will disrupt conventional thinking.

Political instability or military conflict in the Persian Gulf could create a lengthy supply disruption, while a resolution with Iran could lead to welcome additions to world supply. An extended global economic downturn would reduce demand but also reduce energy investment critical for the future. Unexpected advances in photovoltaics, batteries or biofuels likely will change the affordability of new technologies.

The U.S. should have a comprehensive, long-term energy strategy. But when unforeseen events arise, we should adjust as necessary to take advantage of unexpected opportunity.

Mr. Deutch is a professor at MIT and former under secretary of the Department of Energy. He currently serves on the board of directors of Cheniere Energy and was formerly on the boards of Schlumberger, CMS Energy and Citigroup.