Musings from the Oil Patch February 20th 2018
Comment of the Day

February 21 2018

Commentary by Eoin Treacy

Musings from the Oil Patch February 20th 2018

Thanks to a subscriber for this edition of Allen Brooks’ ever informative report for PPHB. Here is a section on methane hydrates:

The attacks on the oil and gas industry in the U.S. for its methane emissions have been based on reports and estimates of the volume of leaks from its drilling and transportation activities.  Fighting these leaks is in the companies’ best interests because it will help the bottom lines as less natural gas will be lost to the atmosphere and income will be enhanced.  Fixing the leaks on their own is also a way the oil and gas industry can hope to stave off further debilitating regulations.  Now, however, the industry is hopeful of an easing of the methane containment rules for companies drilling and producing natural gas from federal lands by the Trump administration.  

While the discussion about methane leak control for the oil and gas industry is dominating the headlines, there remains a huge untapped source of natural gas in the form of methane hydrates under the ocean that some governments are working to exploit.  These hydrates are where molecules of methane gas are entrapped within an ice lattice.  They form under very low temperatures or high pressures, or a combination of the two.  They are usually found on the outer continental shelves around the world.  (They have been found in the pink areas of the global map in Exhibit 18.)  The challenge is that they have been difficult (risky) to mine, as well as costly.  They have the potential to blow up any vessel attempting to extract the hydrates from the sea floor.  The U.S. Bureau of Ocean Energy Management (BOEM) estimates that the U.S. has 51,338 trillion cubic feet of methane hydrate gas resources.  If only half of BOEM’s estimate is realized, there are 1,000 years of supply based on the current consumption rate of natural gas in the United States.

Last year, China, a country with significant needs for more natural gas but lacking success in finding and developing meaningful reserves, has been experimenting with tapping methane hydrates.  The country’s focus is on hydrates situated in the South China Sea, which helps explain China’s attempt to claim territorial rights to that area of the Pacific Ocean.  At the same time, Japan, another nation lacking adequate energy resources, has successfully extracted methane hydrates from an area offshore the Shima Peninsula.  The implications of successful development of methane hydrate mining by either or both countries would be significant for the future of the global liquefied natural gas (LNG) business.


Eoin Treacy's view

Here is a link to the full report.

If one were looking for a single reason China is so interested in claiming the South China Sea, then methane hydrates are probably the answer. The existence of such vast resources is no secret. Just like shale oil and gas, geologists have known about methane hydrates for years. However, they have been largely irrelevant to the energy sector because of the cost of production.

That is why it only every makes sense to say that a given resource will be expended at a given price and based on current technology. Peak oil, gas, copper or gold arguments are only every medium-term considerations. They remain valid until the price rises enough to encourage new sources of supply into the market. Incremental advances in the cost of marginal production therefore play a vital part in the consideration of where prices are likely to stabilize when that new supply enters the market.

For oil that seems to be somewhere around $35 which approximates the upper side of the underlying long-term range. Natural gas, due to it being primarily a North American market is the only commodity that has fallen all the way back to the levels that prevailed before the commodity boom.

The unseasonably warm weather in the US northeast has resulted in natural gas prices falling back to test the $2.50 area, where at least near-term support was found this week. However, the low posted February 15th will need to hold if potential for additional steadying is to be given the benefit of the doubt. As Allen Brooks’ highlights in the above report, gas traders are now almost alert to weather forecasts as farmers.    

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