Low natural gas price casts doubt on 'proven' reserves

nathan vanderklippe CALGARY From Monday's Globe and Mail Published Sunday, Apr. 01, 2012 7:00PM EDT

Most years, its an eye-glazing exercise. But calculating reserves how much oil or gas an energy company has buried on its lands has taken on a sudden new importance for an industry in the throes of a remarkable pricing spiral.

Every spring, energy companies update their reserves based on price forecasts done at the end of the prior year. Price is an important consideration in determining the most important class of reserves, called proven, because a company can only say its capable of producing a certain volume of energy if its profitable enough to do so.

Normally, the year-end price estimates are a pretty good indication of whats to come, and make for a reasonable estimate of a companys reserves. But this year, a sudden drop in natural gas prices has raised significant question marks over the accuracy of the reserve figures that have been issued in recent weeks.

Its a safe assumption that a large part of Canadas natural gas reserves are [overstated], said Eric Nuttall, portfolio manager for Sprott Energy Fund.

That has significant ramifications, especially for those looking to evaluate the worth of companies with major gas holdings. Reserves are an important component of calculating the net asset value of a company. And this year, they could be wrong, by a lot. The difference in assumptions is stark, and anyone looking at corporate reports might be led to expect stronger pricing than companies are actually getting. Indeed, gas prices have gotten bad enough that observers expect cash flow for some companies to dip into negative territory.

To illustrate the difference in expectations, take the price assumptions used by GLJ Petroleum Consultants, one of the most important reserve evaluators in the country. GLJs price deck, or forecast, for 2012 assumes second-quarter gas prices of $3.65 (U.S.) per million BTU, and a full-year average of $3.80.

The actual price of gas is far worse. Natural gas for delivery in the second quarter has traded at barely more than $2, while the average of futures prices for the remainder of 2012 is $2.53. Thats fully a third below the figure used to estimate reserves.

Some analysts are even more pessimistic. If gas stays at or below $2 for much of the year a possibility, given the strong likelihood Canadian storage will fill up, and the chance U.S. storage will also near capacity, creating market havoc this years reserve calculations could be substantially off the mark.

Last year they were using $4.50 for the price deck. And weve seen over a 50-per-cent decrease in the price of gas, said Marin Katusa, an analyst with Casey Research. The real [reserve] writedowns are going to be up to 40 per cent.

See original here:
Low natural gas price casts doubt on 'proven' reserves