By Duncan Sutherland – Exclusive to Gas Investing News

Market news

The radical realignment of oil and gas prices after Hurricane Gustav’s relatively tranquil passage through the Gulf of Mexico has been interesting to watch.

NYMEX futures showed light crude taking a body blow, while natural gas seemed to largely shrug off the news. Part of this is the onset of autumn’s cooler weather and the coming demand increase for home heating and electrical generation.

Crude futures, in my opinion, are being buoyed by speculation much more than natural gas futures. The slide of the past months gradually removed the speculative premium in gas, while oil futures suffered a few big hits.

The Marcellus Shale formation in the Northeastern United States continues to produce good news. New numbers out of New York state show that 2007 natural gas production at 54.9 billion cubic feet, just under the previous year’s all time high. The Marcellus Shale covers an area including parts of New York, Pennsylvania, West Virgina, Ohio, and Maryland. Most significantly, exploration is ramping up in almost all of these areas, suggesting that the future holds even bigger production numbers for these states.

The National Post is reporting that CIBC World Markets is drastically reducing its year-end target for the TSX, in large part due to declines in energy and commodity prices recently. The target now stands at 14,000, down from the previous target of 15,250.

Company news

ConocoPhillips (NYSE:COP) and Origin Energy (ASX:ORG) will join forces to build an Australian-based natural gas business. The project would be vertically integrated; covering the production cycle from exploration to sales. The specifics of the plan call for ConocoPhillips to pony up US$5 billion for the joint venture and pledge to pay the first US$1.15 billion (AUD) of expenses for the joint venture. In return, ConocoPhillips would get half of the equity in the Origin Energy CSG subsidiary, which holds significant coal bed methane production.

Shanghai Diesel Engine Company (SHA:900920) is looking at Malaysia as a potential expansion market for its natural gas vehicle engines. The company already does good business in neighbouring Thailand, and with the Malaysian governments new incentives for natural gas vehicles, the move seems a smart one.

This move is part of a larger interest in natural gas vehicles, which are growing in popularity worldwide. Similarly, Argentina’s longstanding success with natural gas vehicles is drawing in U.S. companies. Other than Utah, natural gas vehicles are not especially popular in America, but the huge price differential between compressed natural gas and gasoline makes the former attractive to consumers.

International news

Two interesting international stories caught my attention this week. One appeals to my optimism, the other to an ingrained sense of pessimism.

Starting on the negative side, Oregon Senator Ron Wyden (D) is launching a (hopefully quixotic) crusade to prevent reauthorization of Alaskan natural gas sales to Japan. Though I am certain Senator Wyden has his constituents’ best interests at heart, the Democratic party’s recent turn towards protectionism is a worrying foretaste of what might be expected from the next Congress, where the House and Senate are both forecast to be controlled by the party.

More positively, Iraq’s Cabinet has agreed to the terms of an agreement with Royal Dutch Shell (NYSE:RDS.A) to allow gas production in the Shia-majority provinces of southern Iraq. With the state-owned South Oil Co. holding 51% of the joint venture, this deal falls well within the normal range of joint ventures between state-owned and publicly traded companies. The deal’s passage suggests stabilization within Iraq’s government.

What I find most worrying about this deal and the previous deal with China National Petroleum Corp is that they both involve projects in majority-Shia parts of the country. Iraq’s volatile ethnic/sectarian demographic conflicts have long been a source of conflict. The country still does not have a law governing hydrocarbon revenue sharing between the provincial and federal governments. Crucially, the regional status of some major oil fields in the north of the country has yet to be determined.

Though it certainly makes sense for a developing, conflict-torn country to pick the low-hanging fruit first, I will remain guarded until hydrocarbon projects are being announced in the Sunni Arab and Kurdish areas of the country.

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