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2014

US natural gas prices reach two-year high

Higher demand, drilling cuts, lower storage levels raise gas prices 50 percent above record lows, according to Ernst & Young quarterly oil and gas update

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HOUSTON, April 23, 2013 /PRNewswire/ -- Cutbacks in US natural gas drilling and production and higher North American demand combined to decrease storage levels and raise prices above $4/mmbtu in the first quarter of 2013, according to Ernst & Young Oil & Gas Center's quarterly analysis.

Gas-directed drilling fell in 2012 through early 2013, and after natural gas prices hit all-time lows in early-2012, some producers cut back production while others focused on higher-priced liquids. Despite these shifts, natural gas supply continued to soar on associated gas production and lagged infrastructure completions. Meanwhile, demand improved as power generation and industrial usage increased 21 percent and 3 percent, respectively.

"Although $4/mmbtu reflects a more-than 50 percent increase over 2012's record lows, US natural gas prices are still very low compared to global markets," said Marcela Donadio, Americas Oil and Gas Leader for Ernst & Young's Global Oil and Gas Center. "The shale boom has created a new reality of abundant US natural gas. Taking full advantage of this increased supply will require access to the global market in the form of LNG exports."

Oil
Global oil demand growth is projected to increase by less than 1 percent as demand falls in advanced economies but rises in the developing world. Lackluster demand and increases in non-OPEC supply, largely from North America, indicate softer pricing and a challenge for OPEC to manage its production and maintain supply and demand balance.

"Growing non-OPEC production is now impacting global supply and demand dynamics," said Donadio. "With major consuming countries like the US relying more on 'home-grown fuels,' exports are being shifted to new destinations. This creates new trade alliances and relationships."

Gas
Despite the higher US natural gas prices, regional price differences are substantial – highlighting the opportunity to ship US natural gas to advantageous markets.

Access to new gas supplies from planned LNG projects in the Eastern Mediterranean, Eastern Africa, US and Canada will create greater pricing balance and impact the economics of many proposed LNG projects. Australia's booming LNG sector, which is experiencing rapid cost escalation, will be the most pressured by these new supplies.

Midstream
Surging North American supply, both in terms of oil and natural gas, has created substantial logistical constraints and bottlenecks as well as triggering unprecedented infrastructure investment. As many as 20 mid-to-major sized pipeline projects are slated to be completed in 2013 and another 20 mid-to-major projects are slated for 2014. Crude-by-rail capacity is also surging as rail shipments of crude are estimated to have increased by more than 50 percent in 2012.

Downstream
The downstream industry continued to gain momentum and experienced slightly higher margins in the first quarter on modest demand growth and less available capacity during refinery maintenance season. Midcontinent refiners, with access to the advantaged Bakken and other regional crude supplies, have benefitted from the lower prices. 

Oilfield services
Total global rig counts have flattened and remained below year-earlier levels through the first quarter of 2013. In the US, rig counts have declined on reductions in gas-directed drilling. Oil-directed drilling dominated first quarter activity although it has also slowed due to reduced incentives for NGLs. Global upstream spending is increasing, but at a slower pace than in recent years. Spending is estimated to have been up by about 10 percent in 2012.

Transactions
On the back of a record year with total deal value topping $400 billion in 2012, oil and gas transactions activity slowed significantly in the first quarter of 2013, though numbers were still higher on a quarterly basis year-over-year. North American transaction activity fell sharply in the first quarter, especially in the upstream sector.

About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. This news release has been issued by Ernst & Young LLP, a client-serving member firm of Ernst & Young Global Limited located in the US.

For more information about our organization, please visit www.ey.com

How Ernst & Young's Global Oil & Gas Center can help your business
The oil and gas industry is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. Ernst & Young's Global Oil & Gas Center supports over 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors.

The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key industry issues. With our deep industry focus, we can help your organization drive down costs and compete more effectively to achieve its potential. For more information, please visit www.ey.com/oilandgas.

Contact:
Erin Dillard
713-513-9503
Erin.Dillard@fleishman.com

SOURCE Ernst & Young



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