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Why Natural Gas Prices Collapsed

Natural gas prices have collapsed…

Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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As Natural Gas Prices Languish the Gulf of Mexico Executes a Successful Oil and Gas Lease Sale

The Central Gulf of Mexico Oil and Gas Lease Sale 213 attracted 642 bids from 77 companies on 468 lease tracts.

Most impressive was what these companies paid. High bids for the round came in at a total $949 million. That's up 35% from the $703 million received in the last Central Gulf sale.

Most amazing is the fact these bids come even as natural gas prices languish in the $4 per mcf range.

Of course, there is significant oil potential in the Gulf. But even more than that, companies are being drawn to the GOM by a number of big plays discovered in the area recently.

Ultra-deep water has become a major draw after a few world-class discoveries over the past three years. And new plays idea have made even the shallow continental shelf a once-again busy area. Chevron for one, was very active in shallow bids in last week's round.

For a mature basin, there's a lot going on here.

This has everything to do with taxes. A decade ago, the GOM was a dying area. The easy fields had been found, and discovery rates were declining. Exploration companies were pulling out in favor of greener pastures abroad.

So the U.S. government did the right thing. Lowered royalties and taxes on Gulf production. To the point where the "government take" (the total percentage of revenues from petroleum sales taken by the government in the form of royalties, taxes, production sharing, bonuses, etc.) for the GOM is now the lowest in the world.

This revitalized the region. Suddenly drilling economics vastly improved. So that it was worthwhile for companies to test new and daring ideas about deeper and unconventional potential.

And test they did. Leading to the major discoveries that set the stage for several new plays now commonplace across the Gulf. Other companies came in to follow up on the new models. The region revitalized. Which is why bid rounds still attract near-billions in lease payments.

Compare this with the world's other major, mature offshore basin, the U.K. North Sea.

After decades of production, the North Sea went into decline in the late 1990s. The British government attempted to follow America's lead by lowering royalties. Not to the rock-bottom rates the Gulf enjoys, but close.

This attracted a lot of exploration, particularly from smaller companies. But just as many of these companies were settling in and starting to make discoveries, the government flip-flopped. Unexpectedly raising royalties 10%.

The resulting uncertainty gave many companies pause in considering further North Sea investment. And in at least a few cases, the revised economics made development projects uneconomic (or at least pushed them to the brink).

The result being that the last major discovery in the North Sea, Buzzard, happened way back in 2001. Far from the prolific discovery success seen in the GOM over the past decade.

When it comes to mature basins, less is everything. The less encumbered exploration companies are, the more discoveries will be made. And discoveries (along with the know-how that produces them) are the lifeblood of natural resources, in any place on earth.

By. Dave Forest of Notela Resources




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