Thursday, April 28, 2011

The Era of Cheap, Abundant Natural Gas is Here

Simply put, the era of cheap and abundant natural gas has begun. The price of natural gas is now less than one-quarter that of oil on an energy equivalent basis. Indeed, it has fallen more than 25 percent over the past three years. When adjusted for inflation, American consumers haven't had cheaper natural gas since December 2002 (see chart). 

The success of horizontal hydraulic fracturing of shale gas and the profound importance of natural gas on America's energy future can't be minimized any longer. The surging supply of domestically-produced shale gas in the last few years provides overwhelming evidence that the U.S. has enough natural gas to easily meet demand well into the next century.

~From my editorial in today's Detroit News

10 Comments:

At 4/28/2011 9:36 AM, Blogger geoih said...

As reported in the Detroit News at virtually the same time it was announced that DTE Energy (Detroit Edison and Michigan Consolidated Gas) are implementing rate hikes approved by the state's public utility commission.

 
At 4/28/2011 10:34 AM, Blogger Bruce Hall said...

You forgot the one greatest expense factor that will be driving prices to astronomical levels: the EPA.

 
At 4/28/2011 11:28 AM, Blogger juandos said...

Personally I wonder what the Detroit News uses as a definition for the word, "era"?

Look at Henry Hub Natural Gas Price graph...

 
At 4/28/2011 1:31 PM, Blogger VangelV said...

How do producers who need $7.50 gas to break even continue to produce at a loss and stay in business?

Answer; they don't. We have already seen a transition to shale liquids among some of the earliest players in the sector and production data that indicates the assumptions of ultimate recovery are too high.

 
At 4/28/2011 2:08 PM, Blogger juandos said...

"How do producers who need $7.50 gas to break even continue to produce at a loss and stay in business?"...

Who says they need, "$7.50 gas"?

"We have already seen a transition to shale liquids among some of the earliest players in the sector and production data that indicates the assumptions of ultimate recovery are too high"...

Hmmm, to bad for them...

Apparently not everyone is as pessimestic as you are vangeIV...

The Appalachian natural gas producer raised its 2011 forecast for sales of produced natural gas to 180 billion cubic feet of natural gas equivalent (bcfe) from its earlier forecast of 175 bcfe...

So vangeIV are you betting on the EPA to drive up prices?

That might be a pretty good bet all things considered in this administration...

 
At 4/28/2011 7:15 PM, Blogger VangelV said...

Who says they need, "$7.50 gas"?

The analysts who look at the production and decline rates. If natural gas were that profitable why is Chesapeake transitioning to shale liquids?

Apparently not everyone is as pessimestic as you are vangeIV...

The Appalachian natural gas producer raised its 2011 forecast for sales of produced natural gas to 180 billion cubic feet of natural gas equivalent (bcfe) from its earlier forecast of 175 bcfe


I have never claimed that all producers will lose. Clearly there are some worthwhile players out there who have great properties that could make them a lot of money. That is not true of the shale formations in general. And if a company makes certain projections about recovery rates it can easily reduce its 'costs' and report profits where none exist.

But even if EQT were legit it is still way overvalued. The last time I looked at it, the company was selling for 5 times sales and had a pile of debt that had to be repaid. Until I see some real decline numbers and some positive cash flow there is no way for me to take the risk of buying into a company like it or any of the shale players. Of course, I am very conservative and prefer reality to hype. While that keeps me from profiting from participating it keeps me solvent and very comfortable.

 
At 4/29/2011 2:21 AM, OpenID Sprewell said...

Looking at these long-term pricing numbers in this post and previous ones, what's the big deal if we're simply going back to the same pricing as the '80s and '90s? It's not like we had some huge move away from petroleum then, it would appear we're still waiting on good ways to use all that natural gas.

 
At 4/29/2011 6:47 AM, Blogger VangelV said...

Looking at these long-term pricing numbers in this post and previous ones, what's the big deal if we're simply going back to the same pricing as the '80s and '90s? It's not like we had some huge move away from petroleum then, it would appear we're still waiting on good ways to use all that natural gas.

With the collapse in the purchasing power of the USD seeing the same prices would be a very big deal because it would make it easier to handle the massive inflation that has been chipping away at middle class earnings and savings for decades. But as I said, if you pay attention to the conference calls and the analysis you will see that the actual decline rates indicate that you need around $7.50 gas to break even. This is why the shale patch is burning through cash flow even as it is reporting profits and why many companies have to borrow to keep drilling for as long as they could. If they didn't do that you would see many of them in bankruptcy.

 
At 4/29/2011 10:36 AM, Blogger juandos said...

"But even if EQT were legit it is still way overvalued"...

Coming from a 'fervent peak oil believer' you'll have to forgive me for chuckling...

 
At 4/29/2011 6:21 PM, Blogger VangelV said...

Coming from a 'fervent peak oil believer' you'll have to forgive me for chuckling...

It does not matter. The energy return on energy invested for shale cannot be justified, even if the peak in oil production is behind us. Even if EQT is in a great position now by being in one of the sweet spots, there isn't enough such spots to make shale worthwhile. You would be better off in heavy oil, tar sands, conventional oil, or even coal or conventional natural gas. Five times sales does not make any sense when the company owns more than a billion and has negative cash flow. Why not pick up a nice coal company wit decent reserves in a safe jurisdiction instead?

 

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