Monday, August 25, 2008

"Divine Intervention": Drilling Boom Revives Hope for Natural Gas, Prices Fall By 42% in Two Months

NY TIMES -- American natural gas production is rising at a clip not seen in half a century, pushing down prices of the fuel and reversing conventional wisdom that domestic gas fields were in irreversible decline.

The new drilling boom uses advanced technology to release gas trapped in huge shale beds found throughout North America — gas long believed to be out of reach. Natural gas is the cleanest fossil fuel, releasing less of the emissions that cause global warming than coal or oil.

Rising production of natural gas has significant long-range implications for American consumers and businesses. A sustained increase in gas supplies over the next decade could slow the rise of utility bills, obviate the need to import gas and make energy-intensive industries more competitive.

“It’s almost divine intervention,” said Aubrey K. McClendon, chairman and chief executive of the Chesapeake Energy Corporation, one of the nation’s largest natural gas producers. “Right at the time oil prices are skyrocketing, we’re struggling with the economy, we’re concerned about global warming, and national security threats remain intense, we wake up and we’ve got this abundance of natural gas around us.”

Domestic natural gas prices have already plunged 42% since early July, an even faster drop in price than oil or most other commodities, in part because the rapid supply growth has begun to influence the market (see chart above, prices have fallen to the lowest levels since early January 2008).

MP: One more reason that inflation's not a problem: energy prices are plummeting. Natural gas has fallen by more than 42% in two months, and gasoline was spotted for $2.99 per gallon this morning in Mississippi.

14 Comments:

At 8/25/2008 10:12 PM, Anonymous Diz said...

Gas has come down a lot the last couple months, but we have been drilling shales pretty heavily for some years now. so I don't think the shale drilling is the immediate cause of the recent drop.

Though it's fair to say that without it prices supplies would be much, much tighter.

Price was high early in the year due to relatively low inventories compared to recent years. In part due to a colder winter and reduced LNG imports due to high prices in Europe and Asia. Gas price also tends to be somewhat sympathetic to oil price.

Also, gas is typically quoted in $/MMbtu at Henry Hub, Louisiana.

 
At 8/26/2008 12:19 AM, Blogger Robert said...

I am in an area that has a "shale play" in Arkansas. Chesapeake is putting wells all over here. Today I was told they are doing 1-2 million cubic feet? per day. Supposedly they recently hit some in North Louisiana that are doing 20 million cubic feet per day. Mark, I wrote a short article on the amazing invisible hand I see everyday here. Let me know if you want to read it for consideration to post.

 
At 8/26/2008 3:28 AM, Blogger Mark J. Perry said...

Robert: Yes, I would like to read your article, please send it to me at mjperry@umich.edu. Thanks.

 
At 8/26/2008 9:49 AM, Blogger Swany said...

Mark, on 08/25/2008, I heard on the local 4 news (Detroit) that Gas and hence utility bills for domestic heating are expected to go up by 36% this winter. How is that justified based on your article?

 
At 8/26/2008 10:03 AM, Blogger OBloodyHell said...

> Natural gas is the cleanest fossil fuel, releasing less of the emissions that cause global warming than coal or oil.

Ummm, not that I consider CO2 to be relevant, or "Greenhouse Gases" at all, for that matter, but does that assessment include inadvertend releases of natural gas, in the figure?

Or is it just tied to post-burn releases?

Natural Gas is, basically, methane, which is itself a greenhouse gas and notably more significant in its greenhouse potential than CO2. That is, after all, the complaint about beef and cows -- they belch and fart a tremendous amount of methane, given their numbers.

 
At 8/26/2008 10:10 AM, Blogger OBloodyHell said...

> How is that justified based on your article?

1) What makes you think they had any clue what they were talking about?

2) I could be wrong, but isn't most home heating in the north still derived from so-called "fuel oil", not LNG or LPG? I think "fuel oil" is kerosene, which would not be affected substantially by natural gas prices, if either of those suppositions is correct, and hence might leave a price quite high.

3) I'm not sure if it's figured into that, but over on the anti-green site Greenie Watch there were a couple articles in the last week which discussed expectations that the coming winter was going to be a hard one (Global Warming, and all that... lol) That, too, may play into such calculations, as more cold and more cold days mean higher expenses during the official "winter months".

 
At 8/26/2008 10:53 AM, Blogger David said...

OTOH, there are a lot of factors which will drive demand for nat gas. It's become virtually impossible to build coal power plants, not to mention nuclear, leaving nat gas as the only major source of expanded electrical generation. Some home heating in the NE is switching from oil to nat gas.

Related: Nancy Pelosi was apparently unaware that natural gas is a fossil fuel, and also seems unaware that large oil companies are usually nat gas producers.

 
At 8/26/2008 11:11 AM, Anonymous Anonymous said...

How is that justified based on your article?

It isn't. Natgas prices are 30% higher than a year ago and heating oil prices are 55% higher than a year ago. Although those increased costs will be passed through by the utility to the consumer, the total consumer bill wouldn't rise that high as the utility has pass through non-petroleum costs such as marketing and distribution which will not rise at the same percentage rate.

Eyeballing the charts, and assuming today's prices stay constant throughout the upcoming heating season, the consumer should expect to pay ~15% more for natgas and ~25% more for heating oil this season.
__________

Increased natgas production sure isn't showing up in inventory, so there must be other variables (lower imports from Canada?) to explain the supply/demand/price picture.

 
At 8/26/2008 11:12 AM, Anonymous diz said...

Those big Louisiana shale wells are in the Haynesvlle shale. The wells are somewhat deeper and more expensive than the Barnett (North TX), Fayetteville (Ark.) and Woodford (East OK.) shales which have seen most of the recent drilling. And talking only about shales gives short shrift to the other major source of "unconventional" gas, which is the coal bed plays that have predominated out in the rockies.

As for "inadvertent" releases, I think they are relatively small in proportion to the overall production activity and microscopic in proportion to the amount of methane released in bio decay and digestion. And, though methane is supposed to be a stronger greenhouse gas than CO2, it is also a far less stable gas in the atmosphere. It breaks down far faster than Co2. I don't believe there is much evidence of its concentration increasing.

Finally, "home heating oil" is essentially the same thing as diesel fuel. Kerosene = jet fuel.

 
At 8/26/2008 11:19 AM, Anonymous diz said...

Increased natgas production sure isn't showing up in inventory, so there must be other variables (lower imports from Canada?) to explain the supply/demand/price picture.

Lower LNG imports is a big story. Prices have been consistently higher in Europe and Japan than here.

Consumption is also up 4.2%

Lots of info:

http://www.ferc.gov/market-oversight/mkt-snp-sht/2008/08-2008-snapshot-us.pdf

 
At 8/26/2008 6:59 PM, Anonymous Anonymous said...

They are building a natural gas pipeline from Colorado to Ohio. Also, plans are developing for a narural gas pipeline from Colorado to California.

 
At 8/26/2008 7:01 PM, Blogger OBloodyHell said...

> Finally, "home heating oil" is essentially the same thing as diesel fuel. Kerosene = jet fuel.

Thanks. Fuzzy on that, since I've never lived in a snow-area.

(plus I was too lazy to wiki it).

;-)

 
At 8/26/2008 7:04 PM, Blogger OBloodyHell said...

> Also, plans are developing for a narural gas pipeline from Colorado to California.

Utility companies need to just abandon Cali to the government. Sell the state government all the physical assets and get the hell out. Let the peeeeeple all enjoy a state-run utility for a decade or two, until they are begging industry to come back in and take over and actually produce power instead of hot air and promises.

 
At 9/07/2008 12:28 PM, Anonymous Tony said...

Good Job! :)

 

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