Natural gas pricing is a burgeoning issue for oil and gas companies and for the businesses and consumers who are showing higher demand for the commodity.

One specific issue vexing the market is reserve estimates. According to the 2012 BDO Oil and Gas Risk Factor Report, the issue is a significant “preoccupation” for oil and gas companies.

This from the report:

The inaccurate nature of reserve estimates is a constant issue for oil and gas companies, with 95% citing it as a risk in this year’s survey. The inability to expand existing reserves, or locate adequate replacement sites, is a preoccupation for nearly all companies (98%), especially as industry competition intensifies (89% cite competition as a risk versus 87% in 2011).

There is some clarity developing over the gas storage issue, with the analytical firm Tudor, Pickering, Holt & Co. offering some details about gas storage going into the last three months of 2012:

2012 YTD Weather data has been milder overall with a warmer than normal Q1 and somewhat offset by a hot summer, which should have reduced weather-related demand by 2.2bcf/day.

- Winter Heating Degree Days (HDDs): 2,467 vs. 2,955 norm (488 fewer HDDs).
- Summer Cooling Degree Days (CDDs): 1,334 vs. 1,205 norm (129 more CDDs).
- Total: About 360 fewer degree days than normal.
- Gas impact of weather: 575bcf less gas demand (over 8.5 months = 2.2bcf/day).

Actual 2012 YTD storage change has actually been more bullish than normal. Even though weather related demand has been 2.2bcf/day less than normal, overall storage has outperformed 0.7bcf/day.

- There is currently 24bcf more storage (mid-Sept 2012) vs. year-end 2011.
- Normal is 200bcf higher in mid-December vs. year-end.
- Thus, storage has outperformed 1,76bcf this year (even though weather was soft) or 0.7bcf/day tighter than normal (lower net storage adds).

How will reserves impact natural gas prices? Oil and Gas Investor asked some leading energy industry experts their opinions -- and not all of them were singing from the same hymnal.

Kim Pacanovsky, senior analyst, Energy & Natural Resources, MLV & Co.:
In early to mid-2012, the market feared there would be nowhere to store our overflowing bounty of domestic natural gas when we approached autumn and neared the end of the injection season. Investors believed that that associated gas coming from growing oil rig counts in the Bakken, Eagle Ford and Permian would not be enough to counterbalance the drop in gas rigs. However, this scenario was not to be, thanks to a record hot summer (and thus increased gas use for electric generation), and a steeper than anticipated roll off of natural gas rigs.

At the beginning of the injection season (April 1), gas inventories stood at 927 Bcfe over the five-year average. That was a big number, and responsible for the fear of too much gas and too little space to store it. In the last reported storage number (on Sept. 21, 2012), gas oversupply dwindled to 282 Bcf over the five-year average. U.S. marketed production, the EIA reports, finally leveled out in the first quarter of 2012, while thus far in the injection season average injections have been below the five-year average for all but three weeks. Since the end of the first half of 2012, the gas rig count dropped by 99 rigs, but more importantly horizontal rigs have dropped by 65 rigs. In the same period of time, oil rigs have increased by 11 rigs, and horizontal oil rigs by 34. What these numbers tell us is that horizontal oil rigs (with their associated gas production) are not replacing the loss of horizontal gas rigs and thus, near-term, we would expect continued moderation in gas supply.

Just a few weeks ago, the EIA estimated peak storage capacity at 4,239 Bcf. With six weeks left in the injection season, what are the chances of blowing through this number? At 9/21/2012, storage was at 3,576 Bcfe; a five-year average injection between 9/21 and 11/1 of 391 Bcf imputes a 3,967 Bcfe end to the season. This would be a record high.

Considering our belief that near-term injections will continue to come in below the five-year injection, we believe we will end the season more comfortably below 4 Tcf. The narrowing contango tells us the market no longer believes there is a gas storage issue over the next two months. Longer term, we do expect some producers to take advantage of a more attractive natural gas strip price (the 12-month strip is currently at $3.85/MMbtu) and thus we expect to see gas rig counts leveling off early next year. A cold winter that continues to pare down the storage overage will all but guarantee this. If that is the situation, expect to see continued strength in gas pricing.

Dependent upon the weather, we are comfortable with gas pricing in the range of $3.25/MMbtu to $4.00/MMbtu at year-end. That is a big range, but unless the season is extraordinarily cold, expect gas to stay relatively flat from current levels as we turn the corner into 2013.

Charles Dewhurst, director, Natural Resources practice, BDO USA:
There are three, and only three, factors affecting U.S. storage levels for the fourth quarter of 2012. These are:

- The demand for natural gas driven by heating needs in the northern states, and alternative uses of natural such as liquid natural gas and electric power generation. Also, the supply of natural gas as the industry continues to look to shift production from natural gas and toward oil due to the significant price differential. If the price continues to bump along at historically low levels, supply will decline and demand, while less elastic, may increase.

- E&P companies are tied into natural gas production because of concerns about losing their leases if they do not produce. This will drive demand for storage. We're also seeing an expanded natural gas distribution infrastructure as pipeline construction continues to bring more natural gas from the shale formations into the storage mix.

- Storage issues will not have a big impact on natural gas prices. Those prices will continue to be low as the supply side continues to be bullish for reasons discussed above. Demand will be relatively slow to increase although, long term, switching from coal-fired electricity production to cleaner and abundant natural gas will be great for the industry. Also, liquid natural gas terminals for export will pull in more and more natural gas, but each of these will take a long time to implement.

Gabriele Sorbara, vice president, E&P Imperial Capital LLC:
We continue to have a cautious outlook on natural gas prices; however, as we exit the shoulder months and enter the heating season, natural gas prices should improve. We believe pricing will improve; however, the wildcard is weather -- a difficult variable to predict. With a normal winter, our best guess is for Henry Hub natural gas to average $3.20-$3.40/MMbtu in 4Q12, a significant improvement from the first nine months of the year at around $2.54/MMbtu. With an early cold snap, we could have a significant depletion in inventory levels, pushing prices as high, if not north of $4.00/MMbtu early next year.

Based on the five-year average natural gas storage withdrawals, we could end the year with 3,410 Bcf vs. last year’s 3,472 Bcf. This is a significant narrowing from earlier this year when we were 60% above the five-year average. This, in our opinion, drove natural gas prices higher since April 2012.

Over the next 12 to 18 months, we believe natural gas prices will remain in the $3.00-$4.00/MMbtu range. Longer term, with LNG exports and a potential policy shift toward natural gas, we could easily have prices north of $4.00/MMbtu.

A Balancing Act

With analysts generally bullish on abundant natural gas reserves, and demand rising from consumers, the natural gas market is seeing a pricing balance story play out. Prices may indeed be rising for the short term, but renewed enthusiasm for low-cost coal and continued high gas reserves could bring prices down in 2013.