“If gas stays in the$5–$6 range, that’s what I would call purgatory,” says Oil & Gas Investments Bulletin writer Keith Schaefer, adding “and anything less than that would just be hell.” Learn about new technologies that are greatly increasing the amount of recoverable oil in the world and find out why Keith warns investors to be very, very selective, particularly in Canadian natural gas stocks in this exclusive interview with The Energy Report.

The Energy Report: Let’s start with your big-picture take on natural gas because that’s one that seems to be retaining a low-price profile. People are talking about the high level storage, the improvements in production, the decrease in the cost of taking the gas out. What’s your view of what’s happening in those markets?

Keith Schaefer: I think that in 2010, natural gas is going to have what I call a ‘purgatory pricing environment,’ where it’s going to be low enough that most companies will not make money, but a few of the really low-cost producers will. If gas stays in the $5 to $6 range, that’s what I would call purgatory and anything less than that would just be hell. You’re looking at a situation where the all-in costs for natural gas production in North America is still around $6 to $6.50 per MCF. When the price is below that, few producers are making money.

So investors have to be very, very selective, particularly in Canadian stocks because these companies, for the most part, have high debt levels, higher pipeline costs and a higher Canadian dollar. So it’s going to be very difficult in particular for the Canadian juniors to give any real profits to investors, I think, over the next year.

Having said that, there are a couple of very powerful forces that are bullish for natural gas. The decline rates on these new shale gas plays that are so prolific, are quite high. These gas wells start off with great production, but then they die off very quickly.

We’re already seeing a slight increase in demand for gas. And there are a lot of people calling for gas to be quite a bit higher in the second half of 2010 because the decline rates are so high and demand is coming back. It was reported that for the first time in a year, gas demand was actually up in October and November of ’09. A lot of utilities started using natural gas to generate electricity, so it’s happening.

TER: So is the increase in demand mostly from switching from other sources of electrical inputs or is it from consumers?

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