Saturday, December 31, 2011

Residential Natural Gas Prices Are Dropping in PA and OH, Thanks to the Marcellus Shale Boom

1. "An increased supply of natural gas -- thanks in part to development in the Marcellus Shale -- as well as warmer weather patterns have lead to lower gas prices for Western Pennsylvania customers in the first quarter of 2012. All three utility providers in the region announced lower rates Friday for the quarter starting Jan. 1 and extending through March 31.

2. "Columbia Gas of Ohio customers have something to look forward to in January: bills that are lower than they were a year ago. The company this week said consumers who buy natural gas through its standard service program will pay 19 percent less than in January 2011. Record levels of natural-gas production in the U.S. are a major factor in the price drop.

“Our price for natural gas today is nearly as low as it was 10 years ago. How many other companies can say that about their product?” Jack Partridge, president of Columbus-based Columbia Gas of Ohio, said in a statement."

7 Comments:

At 1/01/2012 11:01 AM, Blogger VangelV said...

Lost in this is the fact that the shale gas boom has destroyed capital. We are one warm eastern winter or an economic contraction away from a wave of bankruptcies in the sector. If I were running a conventional gas producer I would stop all capital investments and cap as many wells as possible. Let the cash flow build up the treasury and be on the lookout for buying opportunities once the shale bubble bursts. After the bubble bursts there should be plenty of desperate oil services companies and enough profit from higher gas prices to activate capped wells and drill off new prospects.

I wonder just how long it will take for the hedge funds to start piling on the short side and begin their attacks on companies that are selling for major multiples above their intrinsic value. When they do we will see what happens when there isn't enough drilling activity to offset the depletion rate.

 
At 1/01/2012 12:01 PM, Blogger Benjamin said...

Vange may be correct; there may be a shake-out.

It may also be true that lowered costs for finding and developing natural gas are successfully applied globally, resulting in even lower long-term natural gas prices (most domestic producers would not be able to compete).

This is just one well in Papua New Guinea, the biggest ever struck in all history, and it was hit in 2009:

2009 - The Antelope-1 gas/condensate discovery well, was spudded in October 2008 targeting a gas column in the Elk/Antelope structure, was flowed at 382 Million SCF/day with 5,000 barrels of condensate per day (BCPD) for a total 68,700 barrels of oil equivalent per day (BOEPD), setting a new record rate for Papua New Guinea. (see press release dated March 2, 2009 for further information Click Here). Ultimately the Antelope-1 was confirmed as a world record flow rate from a vertical gas well by the Guiness World Records.

It may be that existing wells can compete due to low marginal cost of production, but that newer wells have to make money at lower price points, going forward.

It rarely makes sense to "shut a well in" that is producing---and thus the abundant supply off natural gas could have more legs than a centipede.

You now, in downtown Los Angeles the office market has been "glutted" since a building boom in the 1980s. But there is always someone who puts up a newer and better building and robs tenants from older buildings, thus perpetuating the glut for 30 years now.

Rents in downtown Los Angeles are the same, in nominal dollars, as in 1979!!!!

Natural gas could do much the same thing.

 
At 1/01/2012 1:02 PM, Blogger VangelV said...

It rarely makes sense to "shut a well in" that is producing---and thus the abundant supply off natural gas could have more legs than a centipede.

It rarely makes sense to "shut a well in" that is producing---and thus the abundant supply off natural gas could have more legs than a centipede.

You now, in downtown Los Angeles the office market has been "glutted" since a building boom in the 1980s. But there is always someone who puts up a newer and better building and robs tenants from older buildings, thus perpetuating the glut for 30 years now.

Rents in downtown Los Angeles are the same, in nominal dollars, as in 1979!!!!

Natural gas could do much the same thing.


Conventional producers have shut in production many times in the past. If you have no debt and don't like the price you reduce your production and wait for a better time to sell your reserves.

And if you have been paying attention you would know that there should be a lot of conventional natural gas in many regions of the world. (The oil companies never bothered looking for gas because they had no market for it.)

Of course, it takes years to find, develop, and bring that gas to market. Liquifying the gas consumes a big chunk of the energy contained in that gas and when you add the distribution costs you find that LNG can never be very cheap. That leaves a lot of room for domestic producers of conventional gas. The problem is that the US and Canada have had extensive drilling, which means that most of their gas has already been discovered. The big hope for North America is Mexico but that has investment rules that make development difficult.

 
At 1/02/2012 6:22 AM, Blogger Larry G said...

one would think that the capital that is currently chasing natural gas is not "dumb"... that before they put that rig up that that actually have some idea of the ROI.

the idea of "waiting" or sitting on reserves... seems contradictory especially when looking at oil in the US and Canada.. where they can't wait to get it out of the ground and to the refineries.

but I'd admit... that "smart" money chasing bad investments is not exactly an unknown phenomena.

there's also an interesting side issue to the natural gas boom in that propane - a fuel that is about twice as energy dense as natural gas - and largely derived/"refined" from natural gas - is not dropping in price.

 
At 1/02/2012 11:38 AM, Blogger VangelV said...

one would think that the capital that is currently chasing natural gas is not "dumb"... that before they put that rig up that that actually have some idea of the ROI.

That was the idea when the land was first leased. But the terms require drilling or losing the leases. So you get a lot of properties drilled even though the gas will be sold at a loss.

And you are forgetting the value of shale plays to conventional producers. They don't need the production but the ability to hide their reserve declines. If as a CEO of a conventional producer you can acquire a shale gas outfit that loses you a ten to fifty million a year but can book reserves that will keep your market cap high you go ahead. (Particularly when the value of your options depend on hiding the declines.)

Keep in mind that time works both for and against you. While you will ultimately have to write down the shale reserves as uneconomic the market will value your own reserves at a much higher price once the shale bubble bursts.

the idea of "waiting" or sitting on reserves... seems contradictory especially when looking at oil in the US and Canada.. where they can't wait to get it out of the ground and to the refineries.

That is not true. Unconventional producers who used massive amounts of debt to finance their expansion need to bring product to market but low cost conventional producers who have a lot of cash on hand can afford to wait and would have little trouble if they cut their capital expenditures to the bone and idle a few higher cost wells here and there. That is how these producers have behaved in the past and I see no reason to change.

but I'd admit... that "smart" money chasing bad investments is not exactly an unknown phenomena.

If you are a speculator there is no problem with chasing bad investments if you ride the price up and get out before the inflection point.

 
At 1/02/2012 3:23 PM, Blogger rjs said...

this was near me:

4.0 earthquake strikes in US: — A 4.0 magnitude quake Saturday afternoon in McDonald, outside of Youngstown, was the 11th in a series of minor earthquakes in area, many of which have struck near the Youngstown injection well. Officials said Saturday they believe the latest earthquake activity in northeast Ohio is related to the injection of wastewater into the ground near a fault line, creating enough pressure to cause seismic activity. The brine wastewater comes from drilling operations that use the so-called fracking process to extract gas from underground shale.

http://www.google.com/hostednews/ap/article/ALeqM5iMwCS0NNKyvBr0t83QBEYIIQs0RQ?docId=ba320791a27246cca5fa63dca53068cf

 
At 1/02/2012 11:30 PM, Blogger VangelV said...

Officials said Saturday they believe the latest earthquake activity in northeast Ohio is related to the injection of wastewater into the ground near a fault line, creating enough pressure to cause seismic activity.

What is needed is science, not belief. And at the moment the science refutes the idea that fracking causes earthquakes. If anything, fracking could cause pressure to be released and would make earthquakes smaller.

 

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