David Pursell, Research Principal, Tudor, Pickering, Holt & Co.

“We are all of us doomed to spend our lives watching a movie of our lives—we are always acting on what has just finished happening.” 
— Tom Wolfe, The Electric Kool-Aid Acid Test 

It is human nature to let the most recent events disproportionately influence our outlook and behavior. But in the cyclical business that is energy, that is not always the best strategy for success. Keeping that in mind, it is useful to review key energy events in 2009 before diving into the 2010 forecast.

2009: A year in review, or good riddance? The past year was no doubt painful for the energy business due to the lowest commodity prices in years. But maybe we all learned some valuable lessons. Remember, you can often learn more in a down/bear market than in an up/bull market. Everyone is smart, good-looking and bulletproof when commodity and/or stock prices consistently rise and most energy investments work. I do not wish to relive 2009, but it was a harsh (and useful) reminder that the energy business is cyclical. Repeat after me: “The energy business is cyclical.”

Remember those talking heads in April to June 2008 (as oil approached $140/bbl) who justified $100+/bbl oil prices by suggesting that US demand contraction was irrelevant and that high oil prices were proof that developing country demand was strong? And this was the reason oil prices would continue to rise. (“We are always acting on what has just finished happening.”)

Well, 2009 was a year of demand decline for the first time in decades. US natural gas demand was even weaker than the global average. This created low oil and gas prices early in 2009, although oil prices have rebounded with gold and the equity markets.

The United States elected a new administration in a historic election that has brought a different and more aggressive legislative agenda to Washington. It has also brought more questions than answers. Cap-and-trade: Will it pass? Stimulus: Will it work? Cash for clunkers: Was it worth the cost? Health care: Will it sink and take cap-and-trade down with it?

Geopolitically, there’s been no change to the pattern of recent years, as the list of concerns has not shortened: Iran, North Korea, Venezuela, Nigeria … and terrorism hit in the US once more with the recent attack at Fort Hood.

Predictions for 2010. The year ahead will be the year of the gas shale development. This is hardly a bold prediction, but the implications of increasing gas production from emerging shales (the Haynesville, Marcellus and Eagle Ford) continue to change the landscape of the E&P and service industries. In 2008, the hottest oil patch T-shirt was Tudor Pickering Holt’s “Got Shale?” In 2010, the motto will be “Got Shales?”

The reasons are easy enough to understand. Shale development will require fewer rigs in fewer places. A total of 1,500 rigs will be required in the long term to balance the US gas market, compared with 2,350 operating at the peak in 2008. US gas prices will also be lower in the long term: about $6.5/Mcf as supply growth from shales lowers the marginal price of gas. In the short term, an inadequate rig count will cause domestic production to fall and gas prices to rise well above their suppressed 2009 levels. Finally, shale development will place a premium on drilling and completion technologies, as long horizontal laterals and multistage hydraulic fracture treatments require intensive application of technology.

Applying technology from horizontal gas shale developments to oil development is yielding improved results in the Bakken. Other continuous oil plays, the Barnett and the Eagle Ford, will be the new “Bakkens” of 2010. These plays will not eliminate US dependence on foreign oil imports—not by a long shot—but high oil prices and low well costs create exceptional development economics.

New global gas liquefaction projects in Qatar, Russia and elsewhere are scheduled to be onstream in 2009 and early 2010. How much LNG ultimately shows up in the US is dependent upon several key variables: Will global gas demand be soft or weak? Will the new liquefaction projects start on time or be delayed? Will current mechanical problems in existing liquefaction facilities (e.g., Nigeria, Algeria) continue to impact LNG volumes? Will European gas consumers increase their purchases from Gazprom to make up for lower volumes in 2009? Will US gas production decline sufficiently in 2010 (due to the low rig count) to allow domestic gas prices to rise, thereby increasing LNG imports?

US LNG imports will likely increase to 2.5 Bcfd in 2010 from 2009 levels of about 1 Bcfd. The range of potential imports is 1–4 Bcfd due to the uncertainty in key variables driving the global LNG market.

Oil prices will continue to be volatile. Current high negative correlation with the US dollar makes any price estimate difficult at best. Predicting the dollar direction is above my pay grade but, combined with geopolitical uncertainty, oil prices in 2010 will continue to be influenced by factors other than supply and demand fundamentals. Once global demand returns, oil prices should return consistently to the $90/bbl level.

In Washington, I’m not claiming to be an “inside-the-Beltway expert,” but here is my reading of the legislative tea leaves. Cap-and-trade will have difficulty passing Congress. Why? It is simply too complicated. Cap-and-trade creates complex financial derivatives at a time when Congress is still reeling from a burst housing bubble that was caused, in part, by financial derivatives.

Regarding the threat of strict regulations on hydraulic fracturing, cooler heads will prevail, and individual states will continue to regulate hydraulic fracturing and not the EPA.

Further predictions: Texas A&M football will be back. Gig ’em. And to the troops in Iraq and Afghanistan, only one prediction can be made with complete certainty: We continue to send our heartfelt thanks for all that you do to keep us safe and free. God bless. 

THE AUTHOR
	David Pursell is the Head of Macro Research at Tudor, Pickering, Holt & Co. Securities, and was one of the founding partners of Pickering Energy Partners Inc. Mr. Pursell is responsible for macro oil and gas strategy, which includes supply, demand and pricing outlooks. Mr. Pursell previously worked as Director of Upstream Research at Simmons & Company International, and in various production and reservoir engineering assignments at S.A. Holditch and Associates (now part of Schlumberger) in College Station, Texas, and at Arco Alaska in Anchorage. He holds BS and MS degrees in petroleum engineering from Texas A&M University.