Monday, April 30, 2012

Cheap Natural Gas Heralds an Energy Revolution That Will Displace Nuclear, Coal, Wind and Solar

Fred Singer writing for the Independent Institute:

"Consider the consequences of having huge quantities of cheap natural gas available. It will make new coal-fired power plants uneconomic, but it will also make new nuclear plants uneconomic. It is ironic that these two longed-for goals of radical environmentalists are being achieved simply through economics, without the need for any regulation. 

But it is ironic also that cheap gas will completely remove the need for electricity generated by solar or wind—much to the chagrin of environmental zealots. And all those folks hoping that energy prices would continue to rise and that electricity costs would “skyrocket” will be sorely disappointed."

MP:  The huge bonanza of cheap abundant natural gas is the most positive development in America's energy outlook in 50 years as Mort Zuckerman wrote in the WSJ last November, where he also suggested that a seismic shift in the energy landscape as large as the recent shale revolution is extremely rare.  One of the profound implications of the "shale gale" is that its remarkable abundance will displace not only coal and nuclear as energy sources, but also solar and wind energy as well, as Fred Singer points out.

Fortunately, "shale gas seemed to sneak up unannounced to the media and Beltway elites, even though people inside the gas industry realized several years ago what was rapidly taking place," according to AEI's Steve Hayward.  "One overlooked aspect of the current technology-driven fossil fuel energy boom going on in the U.S. right now is that if Washington had any premonition it was going to happen, it would surely have done something to stop it."

Update: The chart above shows natural gas production through February as reported today by the EIA.  On a 12-month moving average basis, natural gas production in February set another all-time record and went above 2.4 trillion cubic feet for the first time ever.  

HT: Warren Smith

13 Comments:

At 4/30/2012 9:45 PM, Blogger gasminder said...

Gosh - I've been tempted repeatedly to comment on these "cheap shale gas" posts and have held off. But please - clearly this is the new paradigm, the great American Industrial Renaissance that is all the rage.

I'm in the business. Economists need to take a deep breath, step back, and understand a couple of points. 1) No shale gas production is economic at 2.00/BTU. Further, no shale play is economic at 5.00/BTU. Thus this idea that the current oversupply will last forever is, to be blunt, a joke. The current oversupply is due to a vast supply of liquidity from the financial sector (private equity $$) combined with the need to "hold by production" leases that were purchased at vastly inflated prices because of (see above).

It is widely believed that there is no dry gas shale play that provides an adequate ROR below $6/BTU and those are rare, most require $7-8/BTU. Significant supplies of gas from liquids-rich shale plays will continue to be available. But the "vast supplies of cheap gas" are not nearly as vast as the hype would have you believe. Further - there is a reason that it was necessary to push the SEC to change reserve reporting guidelines to enable companies to record "statistically" based reserves. That reason had a great deal more to do with the need to justify expenditures than to report ACTUAL producible reserves.

 
At 4/30/2012 10:21 PM, Blogger Jon Murphy said...

Thus this idea that the current oversupply will last forever is, to be blunt, a joke.

No one has said the over-supply will last forever.

No one has said prices will remain this cheap for ever.

What is being said, however, is that natural gas will be cheaper than it has been.

You have to admit, we have a lot of excess gas we need to work through. Prices aren't going to go up significantly for at least several quarters.

I do have a question: over the past decade, nat gas prices have averaged $7+/MBTU for about a three-year period. I understand what you're saying about the RoR, but does that mean an adequate RoR hasn't been returned for 7 of those 10 years?

Another question: Hypothetically, if the US maxes our capacity to store natural gas, what would happen to the price? Would it fall to $0?

 
At 5/01/2012 1:46 AM, Blogger Benjamin said...

Once wells are in production, you get gas at marginal cost of production. Maybe the creditors seize the wells, but the wells keep producing.

Add to that huge natural gas strikes have been made globally, and LNG tankers are being built at record rates.

Natural gas may be cheap---but only in recent context. There is no OPEC to limit production of natural gas. By bad luck, the Oil Gods gave their bounty to monkey-thug nations, like Russia, Iraq, Venezuela, Mexico, Libya, Iran, Nigeria etc.

Natural gas is showing up everywhere. People forget, oil would be cheap if we had free markets all over the world. Natural gas went up in tandem with oil on a BTU basis, but this led to a boom in natural gas drilling and production all over the world. Natural gas is closer to a free market.

Natural gas prices will be soft for decades. Even oil may be entering a long period of stagnation, due to conservation and substitution.

China mandated electric scooters. What if China mandates PHEVs?
Lithium batteries are improving at about an 8 percent annual rate. In 10 years, lithium batteries may be commercially viable--indeed, a better option than other cars.

The private sector does more with less every year. The public sector is parasitical, and does less for more every year, especially the military.

Shrink government.

 
At 5/01/2012 5:10 AM, Blogger Larry G said...

one would think that once a well plays out that a fairly quick calculation could be done to tally up how much gas they sold, how much profit they made and how much expense they had and to know that they either made or lost money.

Seems like if you did that for 10, 20, 100 wells - at some point you'd have a pretty good idea if it was worth pursuing on a longer basis.

where are we in that continuum?

Van thinks they are going broke as we speak.

I'd almost be willing to believe that all the people that are pursuing plus all the companies and CEOs that are making long term plans based on cheaper gas can't be wrong.

but then we know that "bubbles" are not uncommon when it comes to things like dot coms, the housing market, etc.

Could it be that folks feel that it is not forever and it is short term but it's basically a bridge fuel to breakthroughs in nukes, solar, wind, etc?

how many years of capacity do we REALLY Have? Is it a couple hundred or 25?

 
At 5/01/2012 5:12 AM, Blogger Larry G said...

re: " Natural gas is closer to a free market"

hmmmm.. not as free as oil in terms of being able to be easily and cheaply transported.

it acts more like stranded resource.

nat gas prices are all over the map across the world, right?

 
At 5/01/2012 5:22 AM, Blogger Larry G said...

oops...

" cheaply EXPORTED"

 
At 5/01/2012 6:40 AM, Blogger gasminder said...

John Murhpy:

"No one has said the over-supply will last forever.
No one has said prices will remain this cheap for ever."


I'm seeing a LOT of hype that the "era of cheap gas" is here for a very long time.

"What is being said, however, is that natural gas will be cheaper than it has been"

Well that depends on what you mean by "has been". As you mention gas has only been above $7/BTU for 3 of the last ten years - I'm telling you that most dry gas shale plays are not profitable below $7/BTU if cradle-to-grave costs are included.

"Prices aren't going to go up significantly for at least several quarters"

Absolutely correct, in fact I doubt prices rise significantly for a few years. I just question the widespread euphoria that "cheap" gas is here to stay. What many don't know is that these "resource" play wells decline MUCH faster than the older conventional reservoirs. If economics don't justify replacement wells the supply of "cheap" gas will rapidly diminish once the spigot of investment capital shuts off.

"over the past decade, nat gas prices have averaged $7+/MBTU for about a three-year period. I understand what you're saying about the RoR, but does that mean an adequate RoR hasn't been returned for 7 of those 10 years?"

That is exactly what it means. Companies obscure this information carefully, most specifically through "booking" large reserves based on extrapolating future recoveries that are questionable over large areas "to be drilled later" (known as "proven undeveloped") and by considering much cost to be "sunk". Observe the necessity of the very largest shale player to repeatedly bring in inexperienced (often foreign) companies to pay exorbitant prices and drilling carries for a "piece of the action" in order to stay liquid. If these plays were providing an adequate ROR this would not be necessary and certainly not on the scale you see. The people making money in shale plays are predominantly 1) those who acquire acreage early and sell out to the latecomers, 2) those who have positions in plays that provide significant liquids along with the gas.

Gas is not going to be expensive for quite some time - but the supposed large reserves of cheap gas are not nearly as large nor as cheap as those outside the industry commonly believed.

 
At 5/01/2012 7:10 AM, Blogger Moe said...

Glad you decided to post gasminder.

I heard this hype before during the tech boom. "New paradigm" and all the blather, until I wanted to ralph. The reality lies somewhere between the highest hype and lowest dismissal.Not getting my panties in a buncn just yet....

 
At 5/01/2012 8:12 AM, Blogger Jet Beagle said...

gasminder, I have no idea who you are, or how much being "in the business" qualifies you to offer opinions about shale gas.

I do know who Rex Tillerson is, and I know his track record. My money is - literally - on Rex Tillerson.

Exxon's big bet on shale gas

 
At 5/01/2012 9:36 AM, Blogger Tom said...

Coal will remain a cheap competitor with natural gas over the long run, this is, for hundreds of years. But the EPA is trying to kill coal, so we'll see if the US can keep using it, or exporting it. The main limit on plentiful cheap energy is liberalism.

 
At 5/01/2012 9:58 AM, Blogger Jet Beagle said...

According to FBR Capital figures reported last December by Platt's all major U.S. shale plays will realize a positive rate of return at $4.00/Mcf (Mcf are approximately the same as MMBTU):

IRR at $4.00 per Mcf:

Haynesville Gas ... 5.5%
Barnett Gas ....... 13.6%
Fayetteville Gas .. 32.5%
Marcellus Dry ..... 62.2%
Marcellus Wet ..... 70.1%
Eagle Ford Wet .... 60.6%

That contradicts the assertion above that:

"no shale play is economic at 5.00/MMBTU"

Gasminder, do you have inside information that FBR Capital does not have?

 
At 5/01/2012 8:03 PM, Blogger gasminder said...

" Jet Beagle" says:
I do know who Rex Tillerson is, and I know his track record. My money is - literally - on Rex Tillerson

So it is your argument that Rex Tillerson made a massive bet on natural gas because he believed it would be extremely cheap for a long time? I sincerely doubt that was the case.

Gasminder, do you have inside information that FBR Capital does not have?

If you carefully read the report you link you will note that the numbers you quote are described "based on company reports". This means (as is also described in the reports) that the numbers assume decline curves that are questionable. It is also likely that they do not include robust "sunk cost" accounting and likely quote drilling costs that are absolute "best case" not actual costs.

Also please understand - when I say "not economic" I mean that the play as a whole does not provide a 20% RoR.

My point is NOT that shale gas is unavailable. My point is that CHEAP shale gas will not be available nearly as long as the current hype suggests. Note the post on this site since we began this conversation that is projecting industrial benefits from cheap gas out to 2025.

I'd also point out that a careful business analysis of the large companies that are gas shale exclusively will show they have required constant capital infusions in order to grow production rates even though we are easily 10 years into this paradigm shift. When do they become self-funding?

 
At 5/02/2012 12:07 PM, Blogger VangelV said...

MP: The huge bonanza of cheap abundant natural gas is the most positive development in America's energy outlook in 50 years as Mort Zuckerman wrote in the WSJ last November, where he also suggested that a seismic shift in the energy landscape as large as the recent shale revolution is extremely rare. One of the profound implications of the "shale gale" is that its remarkable abundance will displace not only coal and nuclear as energy sources, but also solar and wind energy as well, as Fred Singer points out.

You are ignorant of economics if you think that a product that costs $7.50 to produce can save the economy as it keeps getting sold for $2.50. The producers have destroyed massive amounts of capital. That harms the general economy. It is not a positive.

 

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