April 22, 2008 / 9:25 PM / 10 years ago

Natgas headed back to price parity with oil - firm

SAN ANTONIO, Texas, April 22 (Reuters) — The era of natural gas selling at a discount to oil in North America in terms of relative heat content is about to end, an energy industry consulting firm predicted Tuesday.

In a study released at the American Association of Petroleum Geologists convention, Wood Mackenzie forecasts gas returning to its historic one to seven price relationship with oil by about 2012, a shift the firm calls price re-linkage.

“Under current market conditions, with oil pricing over $100 a barrel, a re-linkage would mean gas prices of as much as $13 or $14,” Ed Kelly, Wood Mackenzie’s vice president of North American gas and power, said in a news release.

On Tuesday, gas NGK8 ended at $10.607 per million BTU and light sweet crude CLc1 at $119.37 a barrel. That puts gas at about one-eleventh the price of oil even though a million BTU of gas has about a seventh of the BTU of a barrel of oil.

Gas has been knocked out of its historic relationship to oil by soaring oil prices coupled with pressure on natural gas prices due to increased North American supply, due largely to the success of recent shale gas plays, Wood Mackenzie said.

More equivalent pricing will come when demand for natural gas exceeds domestic supply in about 2012 and the gap has to be closed by importing liquefied natural gas (LNG), which much of the world prices in relationship to oil, experts said.

“Relying on LNG will tie gas prices more tightly to oil. Hence, in the long term, if oil prices remain high, we could see gas prices following suit,” Kelly said in the release.

“The speed with which it gets there depends on supply and demand and how quickly gas becomes short,” said Gavin Law, head of global gas and power consulting for Wood Mackenzie.

Key variables include the level of economic growth, the shape of environmental limits on use of coal to generate power and the productivity of new shale gas plays now being developed, said Wood Mackenzie research principal Jen Snyder.

But the crunch is coming by 2012 or within a few years thereafter, Snyder said. “How painful that will be depends on how high oil prices are,” she said. (Reporting by Bruce Nichols)

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