Friday, November 18, 2011

Two Charts on Natural Gas vs. Oil Prices, Gas is Now 75% Cheaper On an Energy-Equivalent Basis vs. Oil


1. From Scott Grannis (top chart):

"Natural gas is down fully 75% from its 2008 high, while crude oil is down by only 33%. As the top chart above shows, natural gas hasn't been this cheap relative to crude for decades, thanks to significant new drilling techniques which have resulted in a natural gas production bonanza in the U.S. It is hard to underestimate the degree to which cheap and abundant natural gas is going to transform U.S. manufacturing and energy generation in the years to come."


2. From Nathan Slaughter (bottom chart):

And over the decades, we've grown accustomed to oil as one our chief energy sources. So accustomed, in fact, that we're now overlooking a cleaner, plentiful alternative that is about 75% cheaper. The bottom graph above shows the price of crude oil versus the price of an equivalent amount of energy from natural gas during the past three years.

A barrel of oil contains about six times the raw energy content of a thousand cubic feet (Mcf) of natural gas. So all things being equal, with oil prices about $99 per barrel, natural gas should fetch about one-sixth as much, or $16.50 per Mcf. But thanks to horizontal drilling and fracking technologies, the United States is now awash in accessible, cleaner-burning natural-gas resources. And the resulting flood of natural gas has created a surplus, causing prices to collapse.

Natural gas isn't just readily available at a 10% or 20% discount to oil -- but more than 75%. These economics are simple but powerful. It's hard to justify paying $1 for an energy source when you can buy something comparable for $0.25."

15 Comments:

At 11/18/2011 12:19 PM, Blogger VangelV said...

Natural gas isn't just readily available at a 10% or 20% discount to oil -- but more than 75%. These economics are simple but powerful.

You have to love the irony. Mark talks about 'economics' without bringing up the fact that most shale gas producers can't make a profit at less than $7.50. Or the fact that the chart explains why oil companies are buying shale assets. The SEC accounting allows reserves to be reported on the basis of BTU ratios, not price ratios. If you combine that rule with the lack of a requirement to have test wells that prove up reserves it is easy to see why an oil company with a reserve problem may wish to pick up shale players that claim larger than reality reserves that are not economic.

 
At 11/18/2011 12:30 PM, Blogger Hydra said...

Natural gas is cheaper in terms of air pollution, too.

 
At 11/18/2011 12:42 PM, Blogger Benjamin said...

Vange--"Most" cannot make money at $7.49---but globally, can enough to keep prices soft?

More than that, what is marginal cost of production?

Natural gas will be relatively cheap for decades--and we get better all the time at drilling for it (the private sector, unlike the Pentagon, delivers more for less every year, not vice-versa).

Vange, you are betting against man's ability to innovate. That is a losing bet.

Read "Limits to Growth." They predicted we would run out of oil by 2000.

Instead, we glutted in 2008-9, with full tankers stored at Malta, nowhere to offload. And that is with huge producers like Iran, Iraq and Venezuela on the sidelines due to stupid governments. That's 30 mbd right there, in a world that uses 85 mbd.

I see gluts in the future.

 
At 11/18/2011 12:45 PM, Blogger JPINTX said...

I have commented on the first chart before, it may be correct in that it reflects the relationship, but I have no idea what or why it refers to barrels per 10,000 btu. A barrel of oil contains +/- 6,000,000 btus, and the NYMEX contract for natgas is priced per 1,000,000 btus. The second chart shows the relationship much more clearly and in sensible terms.

VangeIV, I agree in general terms with your statement, but I think you are to pessimistic.

 
At 11/18/2011 8:38 PM, Blogger JPINTX said...

one more for VangeIV

I only looked at one Annual report, for Devon. With regard to your comment regarding reserves and accounting for their value, Devon goes to some length to point out that the 6 to one ratio used to convert to BOE is not representative of the price relationship, and show details on their pricing assumptions along with the chart valuing reserves. they value the gas reserves at gas prices, oil at oil prices. I doubt they are alone in this disclosure, so your comment regarding reserves is a least a bit unfair in its implications.

 
At 11/18/2011 10:22 PM, Blogger VangelV said...

More than that, what is marginal cost of production?

On most conference calls the number is around $7.50 if all costs are counted. Aubrey McClendon was also talking about $7.50 gas. Which is why his company is now trying to move away from natural gas and position itself as a shale oil play.

Ben Dell and Arthur Berman have written that the full cost of discovery, development, and operations was around $7.50 to $8 per Mcf.

No matter what Mark keeps posing there is no way to make the numbers work. If prices stay low drillers have to stop drilling and the production levels fall. If prices explode the extra costs show up as price inflation and his narrative about the benign CPI falls apart.

Vange, you are betting against man's ability to innovate. That is a losing bet.

Not at all. I am betting on physics and economics. The energy density of the average shale formation is very low. Extracting that energy is very costly and requires a high investment of energy. So far, the return on shale gas is either very low or negative. Using up 800 MMcf of energy to make the pipes, drill the well, and frac it only to extract 700 MMcf of energy after collection and distribution energy costs are removed from the total makes little sense.

 
At 11/18/2011 10:24 PM, Blogger VangelV said...

I see gluts in the future.

Feel free to short oil. The way I see it, with natural depletion removing 4-5 mbpd of production each year the long side of that bet seems like a very good idea. But not if the bet is on marginal production like shale.

 
At 11/18/2011 10:26 PM, Blogger VangelV said...

VangeIV, I agree in general terms with your statement, but I think you are to pessimistic.

I just report what the 10-K reports make clear and what management says on the conference calls when you actually listen and pay attention. How many times to you have to hear the words 'funding gap' and 'asset sales' before you start to doubt the rosy scenarios being thrown out by people like Mark?

 
At 11/18/2011 10:31 PM, Blogger VangelV said...

I only looked at one Annual report, for Devon. With regard to your comment regarding reserves and accounting for their value, Devon goes to some length to point out that the 6 to one ratio used to convert to BOE is not representative of the price relationship, and show details on their pricing assumptions along with the chart valuing reserves. they value the gas reserves at gas prices, oil at oil prices. I doubt they are alone in this disclosure, so your comment regarding reserves is a least a bit unfair in its implications.

Con Coxe brought up this point years ago. So did many energy analysts, particularly when they looked at the Exxon acquisition. Can you show me what ratio is being used when the 'boe' unit is disclosed? Is it the 6:1 BTU ratio or the 20:1 price ratio?

 
At 11/19/2011 10:07 AM, Blogger Ed Dolan said...

As comments point out current extreme low price for natural gas may not stay but gas will not go back above oil again ever.

It is time to get rid of US regulatory barriers to wider use of natural gas in cars. Other countries do it, U.S. is way behind. See here for some details: http://tiny.cc/hyk65

 
At 11/19/2011 10:53 AM, Blogger VangelV said...

As comments point out current extreme low price for natural gas may not stay but gas will not go back above oil again ever.

Sorry but I have no idea what this means. Do you mean that the price ratio will stay at 20:1 as it is now? Or that the 6:1 ratio will never be reached again?

The way I see it there should be a lot of conventional natural gas still around the world. These reserves were ignored in the past because there were no markets for them. That will change. But I do not see shale gas as viable unless something new comes along to make it easier to collect the gas from such a low density medium.

 
At 11/19/2011 12:39 PM, Blogger Ed Dolan said...

"extreme low price for natural gas may not stay but gas will not go back above oil again ever."

I simply meant that it is unlikely that natural gas will ever again be more expensive than oil on an energy-equivalent basis, as it was several times during the 1990s and early 2000s. See this graphic: http://tiny.cc/44yt3

 
At 11/19/2011 10:54 PM, Blogger VangelV said...

I simply meant that it is unlikely that natural gas will ever again be more expensive than oil on an energy-equivalent basis, as it was several times during the 1990s and early 2000s.

That may be right. As I said, there is more natural gas around to be found than oil and it should be easier to extract.

 
At 11/25/2011 2:17 PM, Blogger RescueTaxPayers said...

I want to see the dialog in Washington change from "how to reduce the deficit" to "how to make ourselves energy independent" within 5 years. With super cheap nat gas, and known NG reserves exceeding 100 years, I want to see us build a pipeline along all US highways so that NG will be dispensable at all fuel stations along our national hwys. And while they are at it, I want to lay some fibre optic lines next to the NG pipelines so that we have Hi Speed wireless everywhere in this country within 5 years.

All it takes is a chimpazee with an ax to cut the deficit. It takes leadership and imagination to build a better America.

 
At 11/25/2011 11:13 PM, Blogger VangelV said...

I want to see the dialog in Washington change from "how to reduce the deficit" to "how to make ourselves energy independent" within 5 years.

It is not going to happen.

With super cheap nat gas, and known NG reserves exceeding 100 years, I want to see us build a pipeline along all US highways so that NG will be dispensable at all fuel stations along our national hwys.

It is not cheap to extract and the 100 years number is bogus. The gas producers need $7.50 gas to make a profit if everything goes right.

And while they are at it, I want to lay some fibre optic lines next to the NG pipelines so that we have Hi Speed wireless everywhere in this country within 5 years.

Feel free to invest your own money on NG pipelines and fiber optic lines.

All it takes is a chimpazee with an ax to cut the deficit. It takes leadership and imagination to build a better America.

Well neither of the last two chimps to occupy the White Hose managed to cut the deficit.

 

Post a Comment

Links to this post:

Create a Link

<< Home