Thursday, April 19, 2012

Thursday Energy Links

1.  Chesapeake Energy Corp. CEO Aubrey McClendon in a speech Tuesday in Oklahoma City,"In my opinion, natural gas is no bridge. It is absolutely the foundation of our economy for decades."

2. "The nation's drilling boom has lowered the price of natural gas dramatically. It costs less than half what it did just a year ago. That's cut heating bills and brought some unexpected savings to a lot of families. It's also good news for plenty of businesses, as NPR's Chris Arnold reports from Boston.  A recent study by IHS found that the average household disposable income in the near term was nearly $1,000 higher because of these lower prices of natural gas."

3. Hydraulic fracturing and natural gas development, well under way in Ohio and Pennsylvania, may soon come to Illinois, the latest state to experience an energy rush.  Brad Richards, vice president of the Illinois Oil and Gas Association, said southern Illinois is in the midst of an oil and natural gas lease boom.

"In places like Wayne, Hamilton and Saline counties, there have been tens of millions, perhaps even a hundred million or more spent to acquire these leases," Richards said. The leases are being bought up in the hope that companies could soon start developing shale formations. The formations are part of a large basin that straddles the Illinois, Kentucky and Indiana borders, said to hold up to 87 trillion cubic feet of natural gas.

4. Why Shale Gas Matters to U.S. Manufacturing: New steel mills, chemical plants and jobs could be coming to a shale field near you.

5. Dow Chemical Co. will build a multibillion-dollar plant to convert natural gas into the building blocks of plastic in Freeport, Texas, becoming the latest chemical maker to capitalize on the abundant gas supplies that are helping spur a renaissance in U.S. manufacturing. Even as natural-gas producers cut back drilling in response to the low prices, chemical firms are increasing their manufacturing investments. Dow's new plant here will create 2,000 jobs at the peak of construction, the company says, and is scheduled to be completed in 2017.


40 Comments:

At 4/19/2012 9:10 AM, Blogger Hell_Is_Like_Newark said...

The WSJ today had an article that Dow in planning to build new plants in the Unites States, taking advantage of the low priced natural gas market. The plants will turn natural gas into products used in the manufacture of polymers.

On top of that, Sasol could have a GTL plant in Louisiana up and running in a few years and Exxon has plans to turns Alaska natural into gasoline. GTL is now cost effective at oil prices as low as $60 per bbl.

It will be interesting to watch how natural gas exploration companies do in the next 12 to 18 months. More than a few I bet will be killed off from the under $2 gas environment we are in right now. The ones that can hold on might see a future bonanza supplying gas for the chemical, export (LNG), and transportation fuel (GTL)industries.

 
At 4/19/2012 9:13 AM, Blogger Mark J. Perry said...

I just added a link to the WSJ story from today about Dow Chemical....

 
At 4/19/2012 10:04 AM, Blogger VangelV said...

What is missing from the shale story is the fact that the producers need to find new financing to keep their money losing operations afloat. I thought that an economist would understand that a trend that cannot be sustained has to come to an end.

 
At 4/19/2012 10:12 AM, Blogger Jon Murphy said...

What is missing from the shale story is the fact that the producers need to find new financing to keep their money losing operations afloat. I thought that an economist would understand that a trend that cannot be sustained has to come to an end.

You are correct that prices will not remain this low forever, but my energy clients tell me that the BE point when using fracking is around $2.50-$3.00. Likely, as long as fracking remains prevalent, we'll see lower than previous gas prices going forward.

 
At 4/19/2012 10:20 AM, Blogger Mark J. Perry said...

VangeIV: Maybe you should contact Dow Chemical and tell them to cancel their plans for their new facility, they obviously are missing something, and do not have the complete understanding of the realities of the natural gas market that you have. I'm sure they would appreciate your input.

 
At 4/19/2012 10:29 AM, Blogger SBVOR said...

I was going to say:

"And, the lies from VangelV begin in -- five, four, three, two..."

But, alas, I arrived too late.

Good to see Dr. Perry was already on the job -- nice work, doc (as always).

 
At 4/19/2012 10:29 AM, Blogger Buddy R Pacifico said...

"The nation's drilling boom has lowered the price of natural gas dramatically. It costs less than half what it did just a year ago. That's cut heating bills and brought some unexpected savings to a lot of families. It's also good news for plenty of businesses..."

Oh great, now the speculators are going to read this and artificially drive up prices. :>)

 
At 4/19/2012 10:30 AM, Blogger Moe said...

"A recent study by IHS found that the average household disposable income in the near term was nearly $1,000 higher because of these lower prices of natural gas"

... the 4th mildest winter on record in the lower 48 is P.O.'d he got no mention here.

 
At 4/19/2012 10:53 AM, Blogger rjs said...

Dow isnt going to lose money; it'll be the investors who were suckered into the fracking boom who take the hit...

 
At 4/19/2012 11:23 AM, Blogger Benjamin said...

Who says that natural gas prices are "low'?

Exxon internal documents say they can make money at $1 mcf (they are not aware of Vange).

You see, people are getting better and better at fracking. In the private-sector, people do more for less every year. On top of that, absolutely huge natural gas fields have been found globally, that can be drilled conventionally or otherwise.

You can make methanol from natural gas for $1.30 a gallon and Methanex does that right now.

In the public sector, including the Defense Department, people do less with more every year.

So, how long until the GOP gives up on its miracle moonshine, otherwise known as ethanol?

The biggest socialist, pink-o, enfeebling program in America today is ethanol.

 
At 4/19/2012 11:24 AM, Blogger VangelV said...

You are correct that prices will not remain this low forever, but my energy clients tell me that the BE point when using fracking is around $2.50-$3.00. Likely, as long as fracking remains prevalent, we'll see lower than previous gas prices going forward.

The $3 figure does not include all of the costs and is not valid for the typical shale formation. Chesapeake was talking about $7.50 BE for the average shale formation in the good areas.

Look at the 10-Ks and listen to the conference calls. All those comments about funding gaps and asset sales are important.

 
At 4/19/2012 11:27 AM, Blogger VangelV said...

VangeIV: Maybe you should contact Dow Chemical and tell them to cancel their plans for their new facility, they obviously are missing something, and do not have the complete understanding of the realities of the natural gas market that you have. I'm sure they would appreciate your input.

Has Dow approved a plant? Has it signed long term contracts that will provide it with supplies for the life of that plant? When either of those happen we can discuss this. Until then you are just engaging in the typical hype that you can't stay away from.

Have you actually listened in on the conference calls? Or looked at the cash flows for shale gas producers? How the hell do companies stay in business if they have to keep selling at a loss? Is that some 'new economics' course that you teach but I have missed? In the real world reality matters.

 
At 4/19/2012 11:50 AM, Blogger Mark J. Perry said...

"In places like Wayne, Hamilton and Saline counties, there have been tens of millions, perhaps even a hundred million or more spent to acquire these leases," Richards said. The leases are being bought up in the hope that companies could soon start developing shale formations. The formations are part of a large basin that straddles the Illinois, Kentucky and Indiana borders, said to hold up to 87 trillion cubic feet of natural gas.

VangeIV: You should contact these energy companies that are paying millions of dollars to acquire leases for natural gas drilling in Illinois, they obviously don't have your knowledge of the market, and they are making a big mistake, and will probably lose millions of dollars without your help. Or maybe you could alert them to the conference calls you know about, so that they are as well-informed about the nat gas market as you are....

 
At 4/19/2012 11:58 AM, Blogger Moe said...

"Natural gas is no bridge. It is absolutely the foundation of our economy for decades."

What an astoundingly odd thing for the CEO of an energy company to say. He's gonna get fired soon.

 
At 4/19/2012 12:22 PM, Blogger Buddy R Pacifico said...

April 21, 2011; "Dow Announces Plans to Fully Integrate and Grow North American Performance Businesses with Shale Gas Liquids":

"Dow plans to supply the required ethane and propane for these projects through a variety of supply arrangements, including: a possible joint venture fractionator in Texas, supply from existing fractionators, supply from future new fractionators to be built within the industry, and potential supply deals from various shale gas opportunities such as the Eagle Ford and Marcellus shale regions. Dow has signed ethane and propane supply contracts based on the Eagle Ford shale gas and is pursuing several more agreements from this area.

In addition, Dow has signed a Memorandum of Understanding (MOU) with a wholly-owned subsidiary of Range Resources Corporation (NYSE: RRC), stating plans to enter into a long-term supply agreement for the delivery of ethane from the Marcellus Region in southwest Pennsylvania to Dow’s existing operations in Louisiana."


Propane and Ethane are two of the valuable liquids produced from natural gas production.

Natural gas liquids are, and will be, the moneymakers for most shale gas producers. VangelV and others ignores this in their natural gas narratives.

btw, shale gas producers might want to call their wells natural gas liquid wells, becuase this is where the economic return for production is in many cases.

 
At 4/19/2012 12:36 PM, Blogger Jon Murphy said...

Chesapeake was talking about $7.50 BE for the average shale formation in the good areas.

Look at the 10-Ks and listen to the conference calls. All those comments about funding gaps and asset sales are important.


Explain something to me:

Since 1976, the average price of Nat gas has been about $3.06 per MMBtu. You say that the BE point is $7. The price of Nat Gas has only been above $7 31 times over this time period. That's about 7% of the time. So, the other 93%, these companies are losing money? How can they stay in business?

If we restrict our analysis to the past 12 years, then the price of nat gas has only been above $7 22% of the time, thus the other 78% of the time, the companies must be loosing money.

Look, I've sat in on these conference calls. I've hosted some of them. The energy sector make up about 20% of our business. I've never, ever, heard the amount $7/MMBtu thrown about. The highest I ever heard with fracking was about $4, all things considered.

 
At 4/19/2012 12:42 PM, Blogger Moe said...

"The leases are being bought up in the hope that companies could soon start developing shale formations."

He said "hope" for a reason. Energy companies gamble on sites - some win, some lose. Stick a microphone in front of them and not unlike any other gambler they are going to sound quite positive.

Point being: there is some major hype going on here. One has to wonder what would happen if we experience another record warm winter.

 
At 4/19/2012 1:16 PM, Blogger Breaker Morant said...

In defense of Vange-I fundamentally disagree with him. I think he is missing a lot of things. However, the recent housing boom and the sub-prime mortgage debacle (plus various other disasters) show that the gadflies and contrarians are often right and that industry insiders are wrong.

 
At 4/19/2012 1:24 PM, Blogger Breaker Morant said...

Plus-I think there is a huge risk to Fracking in a second Obama administration. I don't think they will try to kill it before the election-but after? I have no trust that this administration (out of spite alone maybe) would not try to fundamentally disrupt a "Red-State" and "Red" industry like Fracking in a second term.

I suspect that the admin hates the "North Dakota Miracle" and would not mind killing it.

 
At 4/19/2012 1:35 PM, Blogger Jet Beagle said...

Breaker morant: "the recent housing boom and the sub-prime mortgage debacle (plus various other disasters) show that the gadflies and contrarians are often right and that industry insiders are wrong."

I'm not sure the mortgage industry is comparable to the energy industry. The GSE's - Fannie Mae and Freddie Mac - with their assumed government backstop prevented anything resembling market functioning for mortgages.

 
At 4/19/2012 1:52 PM, Blogger VangelV said...

Exxon internal documents say they can make money at $1 mcf (they are not aware of Vange).


From shale? Where do you find that in their 10-K filings?

You see, people are getting better and better at fracking. In the private-sector, people do more for less every year. On top of that, absolutely huge natural gas fields have been found globally, that can be drilled conventionally or otherwise.

Fracking and horizontal drilling are not new processes in their early stages of development. They have been around for a long time and the cost per foot of well drilled has not improved all that much.

In fact, costs are not contained because the huge depletion rates mean a growing demand for new drill crews and new equipment. The injection of such inexperienced crews are keeping costs higher than what they would be in a stable environment. The problem is that the industry cannot respond to market price signals and has to keep destroying capital to meet the lease agreements valid. Which is why the industry is imploding.

You can make methanol from natural gas for $1.30 a gallon and Methanex does that right now.

Methanol is not a good fuel. It corrodes the transportation infrastructure and has a very low energy density. Methanex also produces a lot of its methanol from stranded production facilities that do not have huge demand from their natural gas. If the market demanded the methanol and it could be produced at a low enough cost Methanex would be building many more facilities that use shale gas. The problem for the company is the lack of available gas, particularly after Argentina cut off its Chilean factories. While there has been talk of moving these facilities to the Gulf area I have not seen a supply contract that would allow Methanex to be guaranteed low priced gas for a long period of time.

So, how long until the GOP gives up on its miracle moonshine, otherwise known as ethanol?

You still doing meth? What does the GOP have to do with methanol? It is a bipartisan pork program.

 
At 4/19/2012 2:03 PM, Blogger Breaker Morant said...

Obama on Natural Gas

http://www.youtube.com/watch?v=S0Px4ccLQ-w&feature=related

At 4:34.This is from the famous 2008 Obama/Coal Industry/Bankrupt/Electricity Skyrocket etc speech.

I think most people would agree that the Obama Administration has done a pretty good job at taking down the coal industry as outlined in this speech.

What I have never seen/heard mentioned anywhere is at 4:34 he mentions Natural Gas in the same breath as coal.

Does anyone really think he is happy with the Shale Gas revolution and will not try to handicap it?

I have seen elsewhere that Fracking caught the environmental left, and I, believe, the administration totally off guard. They never saw it coming and they haven't been able to formulate a response yet. Well, I believe that is coming in term 2.

 
At 4/19/2012 2:06 PM, Blogger VangelV said...

VangeIV: You should contact these energy companies that are paying millions of dollars to acquire leases for natural gas drilling in Illinois, they obviously don't have your knowledge of the market, and they are making a big mistake, and will probably lose millions of dollars without your help. Or maybe you could alert them to the conference calls you know about, so that they are as well-informed about the nat gas market as you are....

You should look at the SEC regulations that permit those energy companies to hide their reserve problem by using a 6:1 boe ratio when the price based ratio is greater than 50:1. By the way, those 6 are based on estimates provided by the companies, not any empirical evidence that the actual gas reserves are in place. As I mentioned previously, if I ran an oil company that was having a depletion problem I can use a shale gas acquisition to hide the problem and to 'grow' reserves. That allows me to use my overvalued shares to take over companies that have no such means of hiding their true reserve status. With the cost of acquisition being so low there is no incentive to look for real reserves by other means.

And when the shale gas bust comes and the SEC changes the rules the share price will be bolstered by the far better reserve position and the much higher oil prices.

The best example of this scam is Exxon. This was discussed it when it took out XTO Energy. From what I can tell Exxon is still using the 6:1 conversion factor rather than the 50:1 price based conversion factor. For this to make sense the cost of nat gas need to go near $20 per Mcf or for oil to fall to under $20 per barrel.

 
At 4/19/2012 2:09 PM, Blogger VangelV said...

Propane and Ethane are two of the valuable liquids produced from natural gas production.

That is true. But the overall impact on the shale gas industry is not sufficient to change the lousy economics.

Natural gas liquids are, and will be, the moneymakers for most shale gas producers. VangelV and others ignores this in their natural gas narratives.

You are missing the problem. There isn't enough such production to change the equation. Cash flows are still negative and the companies are still chewing through capital.

btw, shale gas producers might want to call their wells natural gas liquid wells, becuase this is where the economic return for production is in many cases.

You can call your dog a cow but that won't get you any milk. What matters are the cash flows and the returns, not hype.

 
At 4/19/2012 2:15 PM, Blogger Breaker Morant said...

Vange>>>And when the shale gas bust comes and the SEC changes the rules the share price will be bolstered by the far better reserve position and the much higher oil prices. <<<

One other post-not too long ago you said the Shale gas balloon already busted-here you are saying it has yet to come-which is it?

 
At 4/19/2012 2:31 PM, Blogger Buddy R Pacifico said...

VaangelV responds to my "btw":

"btw, shale gas producers might want to call their wells natural gas liquid wells, becuase this is where the economic return for production is in many cases.

You can call your dog a cow but that won't get you any milk. What matters are the cash flows and the returns, not hype."


From the 2011 Range Resources Annual Report:

Page 2 -- "Cash flow from operations rose 23% to $632 million, due to higher production and higher realized prices."

Page 3 -- "As we focus on these
liquids-rich plays, we anticipate our liquids production will increase by 40% for 2012 Increasing liquids production and our strong natural gas hedge position for 2012 and 2013
will help us to continue to grow our Company during this period of low natural gas prices."


This dog hunts for natural gas liquids and retreives cash.

 
At 4/19/2012 2:46 PM, Blogger Benjamin said...

Vange-

Methanol may not be a very good fuel--on the other hand, Indy cars used it for decades before switching to ethanol, in a PR move.

It is corrosive, but not that more so than ethanol. It can handled, as Indy cars proved for decades.

It is cheap, and Methanex will have plenty of cheap gas for decades to come, globally an nationally.

The far that we have been tracking a drilling horizontally for a while does not mean that even more improvements are impossible.

We have been driving cars for a long time too, and yet they get better an better, and get better mpgs also.

Sheesh, I used my first computer in the 1970s, maybe 37 years ago. Actually, I used Fortran cards, you are probably too young to know about those.

In the last 40 years, computers just got better and better--and so will drilling.

Lasers may even become feasible.

 
At 4/19/2012 2:49 PM, Blogger Moe said...

Hi Buddy R;

Two quick observations from someone who has not been on any conference calls ;)
I see the word "anticipate"...always a red flag for me. I can anticipate being a millionaire all I want, but it takes more than anticipation.
Also, cash flow is good – but what's the "net income" situation? All the cash flow in the word doesn’t guarantee a money maker – remember the tech boom?

Cheers.
?

 
At 4/19/2012 3:02 PM, Blogger VangelV said...

Since 1976, the average price of Nat gas has been about $3.06 per MMBtu. You say that the BE point is $7. The price of Nat Gas has only been above $7 31 times over this time period. That's about 7% of the time. So, the other 93%, these companies are losing money? How can they stay in business?

Very good question. A small company that has wells in the best parts of the core areas of productive shale formations can make money at $3 per Mcf until the easy to obtain gas has been taken out of the ground. You can actually avoid fracking and horizontal wells in some of these areas and can have chep vertical wells give you your money back in two years and give you a few barrels of oil per day as clear profit for years to come.

Many companies have just done that for many years. But that is not the business that the large players are in. They cannot choose to drill a few wells in the core areas of the best shale formations. They have to drill hundreds of very expensive new wells at $5 to $7 million a pop and hope that the EURs are sufficient to turn a profit. But they aren't. And let us note that shale only became big after the price of oil and gas exploded. Had prices been at current levels much of the activity would not have taken place.


If we restrict our analysis to the past 12 years, then the price of nat gas has only been above $7 22% of the time, thus the other 78% of the time, the companies must be loosing money.


Just how much shale gas was being produced 12 years ago again? The shale explosion is recent and was based on peak prices.

Look, I've sat in on these conference calls. I've hosted some of them. The energy sector make up about 20% of our business. I've never, ever, heard the amount $7/MMBtu thrown about. The highest I ever heard with fracking was about $4, all things considered.

I just did a quick search to find some references.

Not everyone agrees
What is the Cost of Shale Gas Play?
.

U.S. Shale Gas: Less Abundance, Higher Cost

I suggest that you look at the EURs. What happens to the costs when the ultimate production is half of what has been assumed?

 
At 4/19/2012 3:15 PM, Blogger Buddy R Pacifico said...

Hello Moe,

I was supporting my assertion on NGL being the moneymaker for many nat gas producers. VangelV stated cash flow mattered.

On Anticipation: Range Resources is relying on NGLs to bring in much profitable revenue. DOW is a contracted long term buyer of a lot of Range NGL production.

 
At 4/19/2012 3:20 PM, Blogger Hell_Is_Like_Newark said...

Methanol is not a good fuel. It corrodes the transportation infrastructure and has a very low energy density. Methanex also produces a lot of its methanol from stranded production facilities that do not have huge demand from their natural gas.

Methanol is ideal to be transported in oil pipelines with the oil. It is also easy to turn methanol into gasoline.

Exxon's plan was do this for less than $2.85 a gallon, which includes a $1.45 margin (this was when nat gas was still above $3)

 
At 4/19/2012 3:35 PM, Blogger Hell_Is_Like_Newark said...

Just a side note:

GE did a study a few years back that concluded: 5% of the gas produced is flared off. That 5% equals about 23% of the domestic consumption in the United States.

A lot of this flared off gas happens off shore. Its associated gas brought up with the oil. There is just no way to transport it to market.

There are two small companies that have developed 'micro-channel' GTL process equipment. Both are providing pilot plants to Petrobas. If successful, the gas will instead be turned into syn-crude and shipped to market with the regular crude. Results should be coming in late this year or early next (at least that was the schedule I got from one of the manufacturers when I emailed them).

 
At 4/19/2012 4:02 PM, Blogger Hydra said...

I don't see fertilizer prices coming down, yet.


Good old Fortran cards - high tech.

 
At 4/19/2012 4:40 PM, Blogger Moe said...

With the surplus of fertilizer coming from our elected officials - it's no wonder.

 
At 4/19/2012 5:36 PM, Blogger VangelV said...


One other post-not too long ago you said the Shale gas balloon already busted-here you are saying it has yet to come-which is it?


The shale gas boom is toast. But the SEC rules still allow acquiring companies to use gas reserve estimates AND to use the 6:1 energy ratio when stating boe figures. The true bust will come when the companies have to use the 50:1 price ratio and a method similar to Canada's NI 43-101 when claiming reserves in the ground.

 
At 4/19/2012 7:00 PM, Blogger VangelV said...

From the 2011 Range Resources Annual Report:

Page 2 -- "Cash flow from operations rose 23% to $632 million, due to higher production and higher realized prices."


All operations show positive cash flows. You have to subtract from that the number the cash you need to keep drilling. You do know that you need to look at something other than the few bullets the company provides, don't you?

And did you miss the fact that the company had to sell assets? It dumped d $849.3 worth of holdings in the Barnett Shale formation because that adventure failed to produce the hoped for results. Or that the cash flow is better because the company hedged most of its production? The same hedging opportunity is not available going forward.

Let me end this by pointing out something that has been covered in conference calls and other statements but that you have missed. On page 37 we read, "To the extent our capital requirements exceed our internally generated cash flow, proceeds from asset sales and our committed
capacity under our bank credit facility, then debt or equity may be issued to fund these requirements."
And just as bad for your case, "The price risk on a portion
of our forecasted natural gas, NGLs and oil production for 2012 is mitigated using commodity derivative contracts and we
intend to continue to enter into these transactions. The prices we receive for our natural gas, NGLs and oil production are
largely based on current market prices, which are beyond our control."

 
At 4/19/2012 7:18 PM, Blogger VangelV said...

Page 3 -- "As we focus on these liquids-rich plays, we anticipate our liquids production will increase by 40% for 2012 Increasing liquids production and our strong natural gas hedge position for 2012 and 2013 will help us to continue to grow our Company during this period of low natural gas prices."

Do you have a reading comprehension problem? The company relied on previously hedged positions to get a better price for its product. Later on the company warns shareholders that,  "To the extent our capital requirements exceed our internally generated cash flow, proceeds from asset sales and our committed 
capacity under our bank credit facility, then debt or equity may be issued to fund these requirements."
Now you can choose to ignore this inconvenient fact, close your eyes and hope for the best but the only way for you to be right is to have the price forecasts wrong.

 
At 4/19/2012 7:22 PM, Blogger VangelV said...

Methanol may not be a very good fuel--on the other hand, Indy cars used it for decades before switching to ethanol, in a PR move.

It is corrosive, but not that more so than ethanol. It can handled, as Indy cars proved for decades.


It is corrosive. That means that you can't use the current pipelines and storage facilities for methanol and that you will need plenty of new capital investment that will add to the prices, a fact that you are ignoring.

It is cheap, and Methanex will have plenty of cheap gas for decades to come, globally an nationally.

The producers can't stay in business at these prices. If they go out of business the price goes up and Methanex will not be able to make cheap methanol. TANSTAAFL

 
At 4/19/2012 8:02 PM, Blogger Buddy R Pacifico said...

"Do you have a reading comprehension problem? The company relied on previously hedged positions to get a better price for its product."

No, this is sophisiticated and standard practice for a fossil fuel producer. Of course they hedged. Duh.

VangelV, your throwing anything you can into words and hoping it sticks. It doesn't stick but it does stink.

 
At 4/19/2012 8:36 PM, Blogger VangelV said...

No, this is sophisiticated and standard practice for a fossil fuel producer. Of course they hedged. Duh.


But that is the problem dumdum. They can't get the same higher prices any longer because of the collapse in natural gas prices in the market. And the company warns that it will not have enough cash flow to finance its activities so it might have to add to its considerable debt or sell off even more of its assets.

 

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