In an era of great uncertainty for gas prices, an absolute stands out for producers and investors: $2 gas is unsustainable, according to Kevin Petak, vice president of gas modeling for ICF International, a consulting firm with headquarters in Fairfax, Va.

In a webinar earlier this month, Petak talked about the historically low gas prices in the United States and how they came about. He also provided near- to long-term outlooks for the natural gas industry.

The ICF webinar addressed factors such as production activity; an unseasonably warm winter; production needs of the power, residential, commercial and industrial sectors; and challenges facing the midstream.

The Road To $2 Prices

Increased production and an unusually warm winter are the main factors that forged a path for the current state of cheap domestic natural gas prices, Petak said.

“Gas production has increased during the past few years at unprecedented rates. From 2010 through 2011, we experienced a 4.5 billion cubic feet (Bcf) per day increase in U.S. production,” he said, adding that production currently sits at 70 Bcf per day.

Most notably, Petak said, the Haynesville accounted for 40% to 50% of the domestic production jump during the two-year period. The Marcellus came in second with 20% to 30% of the increase.

“From a conventional vs. unconventional standpoint, it was certainly the shales that were growing dramatically and not conventional natural gas production,” he noted.

“The second major event that led to the unprecedented low prices that we see now is that the winter was a non-winter. Basically, the winter was a spring. It was 16% warmer than usual during the winter -- the warmest winter of record during the last 80 years,” Petak said.

Consequentially, the residential and commercial load was down by about 6 Bcf per day on average throughout the winter, he continued. “Over 150 days of winter, that’s about a 900 Bcf reduction in residential and commercial gas use. It amounts to a 10% reduction in residential and commercial gas use over the course of a year. That is a very significant decline.”

On the flip side, Petak said, the lower prices have encouraged increased gas use in the power and industrial sectors. While electricity demand was also down because of the warm weather, the low gas prices encouraged coal-to-gas switching -- and that led to increased gas consumption in the power sector, he said.

However, Petak pointed out that increased gas demand for power and industrial uses was not nearly enough to offset the reductions in residential and commercial gas use brought on by the mild winter.

“It’s arguable that prices this low -- somewhere around $2 -- are not sustainable. This is a dynamic gas market in North America, and productive capacity and demand respond to lower gas prices,” he said. With a decline in drilling activity and increased consumption by the power and industrial sectors, Petak expects a stabilizing of gas productive capacity.

Near-term outlook

Rig activity has been trending down and is expected to continue declining. From the October peak of last year, gas-directed drilling activity has decreased about 30%, Petak said.

“The composition of where the decline is occurring is important to think about. The Haynesville, as Petak mentioned, accounted for about half of domestic gas production -- 2 Bcf per day -- in 2010 and 2011. But another factor needs to be considered, he said: The rig count in the play is declining. The current number of working rigs is about 40, a total that has gradually fallen since 2010. That year, a rig count of 106 was partly based on the completion of wells that had already been drilled, he said.

“This year, the story changes. Basically, we do not have enough drilling activity to support an increase in productive capacity and we do not have a substantial body of drilled-but-uncompleted wells sitting out there waiting to be brought online this year.

“That’s why I say the composition is very important. First of all, you have a decline in overall drilling activity. But the composition of where the declines are occurring is very important. Some naysayers may say, ‘wait a second, the Eagle Ford is increasing significantly. Doesn’t that prop up the gas projection?’ Yes, but you have to keep in mind that the majority of wells being drilled in the Eagle Ford are oil-directed, and even the gas wells are primarily targeting the liquids-rich portion of the play where the amount of recovery per well is significantly less than a dry-gas producing area like the Haynesville,” Petak said.

“The Haynesville has a recovery volume 7 to 8 Bcf for a dry-gas well, whereas an Eagle Ford liquids-rich well only has a recovery of 2 to 3 Bcf per day. So there’s not nearly enough activity in the liquids-rich plays or the oil plays to offset the decline of activity in the dry-gas plays.”

With diminished gas-directed rig activity, Petak expects production to stabilize. The slowing of drilling and production in the near-term will create an impetus for firming gas prices, he said.

During the coming year he expects 2 Bcf per day of gas production, but that hinges on a return to normal weather and an economic growth of at least 2.5% this year. Petak expects gas consumption in the residential, commercial and industrial sectors to increase. However, the power sector’s gas consumption is expected to decline in the near term but not the long term.

Looking into the near future, Petak expects the demand for gas will increase significantly. “On average, we expect a 1.5 to 2 Bcf per day increase through 2014. Again, these numbers are based on assumption of normal weather,” he said.

Mid- To Long-Term Projection

Looking to the longer term -- 10 years and beyond -- Petak expects the power sector will be the principle driver of demand, consuming 70% of future gas production.

The key takeaways of Petak’s long-term forecast are:

? U.S. and Canadian gas demand will increase to more than 100 Bcfd by 2035.

? While the power sector will command most of the demand, a modest growth is expected in the residential, commercial and industrial sectors.

? LNG exports are also expected to be a new source of demand. U.S. and Canadian LNG exports could rise to 5-6 Bcf per day by 2020, of which 3-4 Bcf per day could come from the Gulf Coast.

? Production will grow in tandem with gas demand. The increases will primarily come from shale gas production. Expect to see declines in conventional gas production, modest increases in tight-gas resources and declines in coal-bed methane production, Petak said.

“We’ve seen some significant declines out of the Power River Basin during the last year as drilling activity declined precipitously,” he said, referring to coal-bed methane.

Petak pointed out long-term uncertainties that will affect gas production and prices: economic growth, emissions regulations for the power sector, and new markets for natural gas such as vehicles.

“Furthermore, significant investment in new midstream infrastructure will be required to support the projected market growth in natural gas, NGLs and oil. ICF estimates that more than $250 billion in new capital expenditures will be required in midstream infrastructure during the next 25 years.

“We think this is a good time for investments in midstream infrastructure, but also in gas, NGL and oil infrastructure. We also think this is also a good time to be looking for purchases of distressed assets. In this type of environment, where gas prices are low, gas producers are holding some assets that they may be looking to convert into cash to continue drilling operations.”