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US to Cut Volumes of Imported Oil by Using Natural Gas to Power Rigs, not Diesel

By Dian L. Chu | Wed, 16 January 2013 22:47 | 1

With China slowing down, and a recessionary GDP projection (below 3%) for the developed world in the next two years or so, many analysts are also projecting far less bullish commodity prices.  Due to the very limited export capacity, the price outlook of the land-locked U.S. natural gas (Henry Hub) is even gloomier without the cushion of more robust demand from emerging nations.

After hitting a decade low of $1.90/mmbtu last April, Henry Hub (HH) natural gas price has managed to climb almost 80% to $3.398 on Jan. 14.  Unfortunately, the same factors tanking natural gas to below $2.00 -- increasing production from unconventional sources via new technologies such as horizontal drilling and fracking, mild weather, weak domestic demand and economic environment – are still alive and well.     

Weekly Natural Gas Rig Count 1

Production has been rising despite a 46% drop of gas rig count during 2012 -- According to Baker Hughes, the natural gas rig count was 434 as of January 11, 2013, vs. 811 at the start of 2012.  Natural gas working inventories already hit a record-high level in early November, and the EIA now expects natural gas consumption to stay relatively flat year-over-year in 2013 with continued production growth.

Related Article: Colorado Enacts Tough New Fracking Measures

US Natural Gas Production 1

But low natural gas price is actually good news not only to the domestic chemical and manufacturing sectors, but also bring in more jobs as many foreign companies are considering moving operations to the U.S. to take advantage of the lower energy costs.

Related Article: What Stands in the Way of Natural Gas Replacing Gasoline in the US?

This has not escaped the attention of no other than the oil industry itself.  Apache Corp. (APA) just came out and said it has partnered with Halliburton (HAL) and Schlumberger (SLB) to find ways to use natural gas to power hydraulic fracturing.  Caterpillar (CAT) was able to develop dual-fuel kits that would allow the engines to run on diesel while idling and natural gas when they are pumping at high RPMs.  Reportedly, Schlumberger is testing a system using compressed natural gas (CNG), while Halliburton is using liquefied natural gas (LNG).

Frac is one of the most energy intensive processes in the oil industry.  According to Apache, only 1% of drilling rigs and zero full frac spreads are powered by gas.  In 2012, the industry will have used more than 700 million gal of diesel to pump sand and water during fracture stimulation. That’s $2.38 billion spent on diesel at a recent average of $3.40/gal.  Converting the process to using field gas would reduce fuel costs by 70% thus driving down the per barrel cost of oil.  Furthermore, by replacing diesel with gas to fuel frac jobs, the US would import 17 million fewer barrels of oil each year.

With some of the plays such as Marcellus profitable even at $2/mmbtu, it is no wonder that Fadel Gheit at Oppenheimer recently lamented that “natural gas prices will be dead for at least two more years.”  Even the commodity perma-bull Goldman Sachs had to lower its 2013 natural gas price target from $4.25/mmbtu, to $3.75.

In this price environment, a straight-forward natural gas investment such as the UNG or even producers would not be that good an idea unless you are in it for the long haul.  The better investment (and less volatile) prospect would be those service technology innovators like the ones mentioned here (Halliburton, Schlumberger, or equipment manufacturers like Caterpillar), since fossil fuels will not relinquish its lead in the end user sectors in the foreseeable future, and that oil companies have resorted to outsourcing technology development to service companies.

Where supply/demand forces might fall short, count on technology to bring the world into a new Oil [and Gas] Renaissance.

By. Dian Chu

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  • Ronald Wagner on January 17 2013 said:
    Great article, and great idea.This should be mandated unless flaring can be otherwise avoided. I can't imagine why they wouldn't all switch drill rigs unless they couldn't afford the conversions. Those who use it will gain an advantage after payback.

    Natural gas is the future of energy. It is replacing dirty old coal plants, and dangerous expensive nuclear plants. It will fuel cars, trucks, vans, buses, locomotives, aircraft, ships, tractors, air conditioners, engines of all kinds. It costs far less. It will help keep us out of more useless wars, where we shed our blood and money. It is used to make many products. It lowers CO2 emissions. Over 4,200 natural gas story links on my free blog. An annotated and illustrated bibliography of live links, updated daily. The worldwide picture of natural gas. Read in 66 nations.
    ronwagnersrants . blogspot . com

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