Tuesday, May 01, 2012

Commercial Natural Gas Prices Drop to 12-Year Low in February, Saving Companies Billions of Dollars

According to data released this week by the EIA, the U.S. price of natural gas sold to commercial consumers fell in February to $7.97 per thousand cubic feet in February. The last time the price of commercial natural gas was below $8 was back in February 2003, and after adjusting for inflation, it's the lowest price since early 2000, 12 years ago.

In a December 2011 report “Shale Gas: A Renaissance in U.S. Manufacturing,” PriceWaterhouseCoppers (PwC) predicted that cheap natural gas will spark an energy-related manufacturing renaissance that has the potential to create one million new American manufacturing jobs by 2025. Further, PwC estimates that lower natural gas costs will generate cost savings of $11 billion annually for U.S. manufacturers, which will make them more competitive globally, and will contribute to greater profitability, increased investment in domestic production, and increased employment opportunities. 

The drop in commercial natural gas prices to below $8 in February (and industrial prices, see update below), and to levels less than 50% of the spikes in 2005 and 2008 above $16, provides evidence that American manufacturers are saving billions of dollars collectively in energy costs as inflation-adjusted prices fall to 12-year lows. Thanks to having access to the world's cheapest natural gas, the U.S. has now emerged as one of the world’s lowest-cost manufacturing locations for producing chemicals, nitrogen fertilizers, ethylene, steel and iron. Welcome to the U.S. manufacturing renaissance, which has the potential to boost manufacturing employment by one million jobs by the middle of the next decade, according to PwC. 

Update: The chart below shows the monthly inflation-adjusted industrial price of natural gas, which was close to an 11-year low in February of $4.25 per thousand cubic feet.  Industrial users are currently paying a price that is about 42% below the $7.31 average between 2001-2012, and about 70% below the peak price in 2008 of almost $14 per mcf. 


35 Comments:

At 5/01/2012 2:01 PM, Blogger Jon Murphy said...

In other news:

Natural Gas Futures in April stood at $2.285/MMBtu, 51.4% below April 2011.

Futures over the last 12 months averaged $3.409/MMBtu, a decline of 20.9% from the same 12 month period last year and the lowest level in over 9 years.

Back to you, Mark.

 
At 5/01/2012 2:12 PM, Blogger Larry G said...

I used to think since propane came from natgas that propane tracked nat gas...

boy was I wrong:

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPLLPA_PRS_NUS_DPG&f=W

 
At 5/01/2012 2:19 PM, Blogger Jon Murphy said...

I used to think since propane came from natgas that propane tracked nat gas...

Propane does come from NatGas. It also comes from petroleum. It's essentially a by-product: butane (which is used in propane) comes from the natural gas process and some propane is released from the petroleum refining process.

If I had to guess, I'd suggest the rise in price is due to the rise, and subsequent increase in refining, of petroleum.

 
At 5/01/2012 2:20 PM, Blogger Jon Murphy said...

By the way, I hope that sounded smart. I pretty much stole it from Wikipedia.

 
At 5/01/2012 2:24 PM, Blogger Moe said...

Party Poopers in Oklahoma

http://www.businessweek.com/ap/2012-04/D9UFASI80.htm

 
At 5/01/2012 2:26 PM, Blogger Larry G said...

you did.. and I've read the wiki article also.

Propane is the gas that people who do not live where nat gas lines exist - use gas vs oil or electricity for heating/cooking.

It's about twice as energy dense as natgas.

I guess I would have thought with a bonanza of increased nat gas and increased domestic drilling that it would also bring down the price of propane.

no such luck....

 
At 5/01/2012 2:27 PM, OpenID chuquito said...

Suppose my "friend," um, wanted to use the knowledge that NatGas prices are falling in order to make some investment decisions.

What should "he" do?

 
At 5/01/2012 2:31 PM, Blogger Jon Murphy said...

Suppose my "friend," um, wanted to use the knowledge that NatGas prices are falling in order to make some investment decisions.

What should "he" do?


He should know that prices aren't likely to stay this low forever. If he was going to buy cheap, now would be the time.

What he should also know is, although prices will have to rise eventually, any significant rise in prices is years away.

 
At 5/01/2012 2:31 PM, Blogger Moe said...

Jon - I can sympathize.
It would be nice to have a cheat-sheet on all the various forms of oil/gas drilling with type of deposits and subsequent extraction/refining costs. I'll get right on that.

 
At 5/01/2012 2:33 PM, Blogger Jet Beagle said...

Just so we're clear, the EIA tracks several different prices for natural gas. Here's how much they varied in Feb-2012:

wellhead price - $2.46/Mcf
industrial price - $4.25/Mcf
commercial price - $7.97/Mcf
residential price - $9.40/Mcf

End user prices are somewhat dependent on variations in the wellhead price, but not as much as one might think. Over the past 12 mos, the wellhead price dropped $1.90/Mcf. Over that same period, the industrial price dropped $1.40/Mcf, but the residential price only $0.60.

 
At 5/01/2012 2:35 PM, Blogger Larry G said...

...." but the residential price only $0.60."

the chart you provided is pretty interesting... as well as how little the residential user is benefiting...

 
At 5/01/2012 2:44 PM, Blogger Jon Murphy said...

Jet-

Using This data from the EIA, that $0.60 decline accounts for a savings of about 5%.

Furthermore, Consumer prices are down 23.0% from the Jan 2009 high, or about $3.63 per Mcf.

I get what you're saying, but the consumer sure ain't getting screwed here either.

I am willing to assume commercial customers get some form of discount because they buy in bulk, so to speak. Can anyone confirm or deny that?

 
At 5/01/2012 2:51 PM, Blogger Jon Murphy said...

Larry,

I just had another thought regarding propane:

It can't be easily piped into buildings like natural gas can. I believe it needs to be stored in a container on premises, correct? That would mean transportation costs that are,no doubt, affected by the rise in gasoline prices.

Thoughts?

 
At 5/01/2012 2:59 PM, Blogger Larry G said...

Jon - yes... it has to be transported in tanks...

I "think" it is moved regionally via pipelines and rail.

You'll often see propane depots next to rail.

but I guess I thought the product itself would also be influenced by nat gas supplies.

It's a racket in Virginia. The companies are largely unregulated and don't post prices or price changes and don't even notify you when they deliver on auto-fill.

you find out how much it is when they put the bill on the door.

It's ideal (except for pricing) in a dual-fuel furnace that uses heat pump to 32 then switches to propane.

 
At 5/01/2012 3:01 PM, Blogger Jet Beagle said...

jon,

I was trying to eliminate any possible confusion. Professor Perry was quoting $8/Mcf natural gas and you were quoting $2.28/MMBTU natural gas futures. (MMBTU and Mcf are approximately the same - about 3% different, I think)

Transmission and admin costs add a lot to the end user price. It costs a lot more to transmit, measure, and collect for natural gas to every household than to do the same for a giant industrial user. But I'm not sure why the commercial and residential rates would be very different. The latter may not be market-driven but rather set by utility commisions.

 
At 5/01/2012 3:05 PM, Blogger Jet Beagle said...

marmico: "You should be looking at industrial prices in connection with manufacturing"

That's right.

 
At 5/01/2012 3:09 PM, Blogger Jet Beagle said...

marmico: "Please convince me that a 30% price savings (or $50 billion) from 2010 is a game changer."

I would think it's a game changer for certain manufacturing industries. Suppose that an Asian factory cannot get $4/Mcf natural gas but a U.S. factory can. If energy costs are a significant part of the production costs, the U.S. factory should have an advantage over his Asian counterpart.

 
At 5/01/2012 3:09 PM, Blogger Jon Murphy said...

But I'm not sure why the commercial and residential rates would be very different. The latter may not be market-driven but rather set by utility commisions.

That could very well be...

 
At 5/01/2012 3:16 PM, Blogger Jon Murphy said...

Please convince me that a 30% price savings (or $50 billion) from 2010 is a game changer.

Imagine you're a chemical producer whose main input is natural gas.

In one year, without you having to do anything, your costs are slashed by 30%. This gives you a bevy of competitive options: lower prices to compete internationally, higher/increase wages to make workers more competitive, explore new product lines, build a new plant, pay a dividend to attract new shareholders, bribe a politician.

Furthermore, you look at the long-term trends of natural gas and think "Maybe prices will be low for several years. That gives us a lot more time to play with and develop our company!"

 
At 5/01/2012 4:09 PM, Blogger Hydra said...

Methane is CH4. It is waht causes explosions in coal mines and sewer mains. Also called ood gas because it can be made from wood.

Ethane is C2H6. These are both gasses at normal temperatures although they can be compressed. In order to liquefy them they must be supercooled.

Natural gas is mostly methane with a few percent of ethane and the longer molecules.

Propane is C3H8. It is a gas at normal temperatures but can be converted to a liquid at normal temperatures by compressing it.

Butane is C4H10 and it can also be compressed to a liquid.

The longer chains are liquids at room temperature, althugh they may be volatile.
Pentane is C5H12 etc.
Octane is C8H16.

The more carbons the higher the energy content, and the more the liquid weighs per gallon. Diesel fuel costs more than gasoline by the gallon, but it also weighs more, so you get more energy per gallon. That is why gasoline is rated according to its equivalent in Octane.

After Propane, the longer molecules also have "Bent" versions called iso-propane, etc.

Each of these is more or less soluble in the others, so mixtures are common. It is also pretty easy to make one from another: long chains can be broken to form more of the smaller and lighter fractions, and small peices can be assembled to make longer ones. If you make a vary long molecule by joining enough butane molecules you eventually come up with paraffin with 25 and up carbons and if you make even longer chains you have plastic.

If you make shorter chains from longer ones, that releases energy, but if you make longer ones from shoreter ones you have to put energy in. Theefore it is easy to crack and separate crude oil into diesel and then gasoline etc. but it is hard to assemble natural gas molecules to create gasoline.


Propane, being more prone to be a liquid than natural gas is more likely to be found disolved in the liquid portions of a well than in the gas portions. The fact that it is dissolved in the liquid portions and under pressure when underground keeps it from boiling off until the pressure is released.

This offgassing it why oil wells are "flared" to get rid of the gas, which cannot be kept without either huge tanks or cryogenics, and isn't enough to warrant a pipeline.

Before you jump down my throat, some of this is a gross simplification, but it is intended to show that petroleum products are a spectrum of things and oil or gas wells are just tapping in to different parts of the spectrum.

Natural gas is also used to make fertilizer, but no price drops there, either.

 
At 5/01/2012 5:02 PM, Blogger Larry G said...

one might think that all these drill rigs are producing wet gas that can be stored and transported via truck since they are likely not sited where there are pipelines.

Is the "frack" gas , "wet" gas?

yeah.. I know.. dumb questions...

 
At 5/01/2012 5:26 PM, Blogger Jet Beagle said...

Larry G,

Not dumb questions at all.

Gas from the Barnett Shale is moved by pipeline. The industry has constructed a vast network of pipelines throughout north central Texas to transport Barnett Shale gas. I assume similar networks have been constructed at other shale deposits.

Shale gas is not the same at all deposits, and varies even across some deposits. Some wells produce wet gas - meaning they contain a considerable amount of butane, propane and other condensable compounds. Some wells produce dry gas - meaning primarily methane.

 
At 5/01/2012 5:33 PM, Blogger Jet Beagle said...

Larry G,

The wellhead price of dry gas is so low that producers are right now shifting drilling to areas which produce wet gas. The condensable liquids must be separated, and that costs money. But the multiple products from the "wet" gas are currently more valuable than the methane-only "dry" gas.

 
At 5/01/2012 6:31 PM, Blogger Larry G said...

Jet.. thanks for the knowledge!

pipelines to all these wellheads?

when I travel through oil country.. I often see the derricks next to oil tanks.. I assume these wells are serviced by tank trucks..

I never realized the pipeline network was so large. You'd think unless they knew the well was going to produce for a decade or more that the pipeline would not be feasible.

but as I said before... I know little and benefit from others sharing info.

 
At 5/02/2012 7:24 AM, Blogger Jet Beagle said...

Larry, many oil wells are not connected to pipelines. But I think every Barnett Shale gas well is. And I assume every shale gas well is, but I don't know that.

You can see a map of the Barnett Shale pipeline network by googling "Barnett Shale pipeline map". That map is several years old, but it does show the hundreds of gas pipelines.

 
At 5/02/2012 7:53 AM, Blogger Larry G said...

thanks JB... I do appreciate it.

 
At 5/02/2012 10:15 AM, Blogger Jet Beagle said...

Primer on natural gas gathering and transmission

Note that the gathering system - the system of pipelines from wellhead to processing plant - uses small diameter pipe. Gathering systems are not really that expensive, especially in regions where pipeline companies already have extensive right-of-way access.

 
At 5/02/2012 10:48 AM, Blogger Larry G said...

thanks for the primer!

 
At 5/02/2012 11:52 AM, Blogger VangelV said...

Note that the gathering system - the system of pipelines from wellhead to processing plant - uses small diameter pipe. Gathering systems are not really that expensive, especially in regions where pipeline companies already have extensive right-of-way access.

You are missing an important point. The pipelines may not be expensive but it is expensive if depletion means that it has to be ripped out in a few years. Pipelines are usually depreciated over 25 years. The cost explodes if the depreciation period is reduced to 5 years or less.

This is a much bigger problem than most people, including many analysts realize. And when you are looking at the producers bleeding red ink the problems escalate.

As for consumers, they pay a great deal for taxes, infrastructure, and transportation costs. Price declines help reduce their costs but not as much as many people think.

 
At 5/02/2012 1:36 PM, Blogger Jet Beagle said...

vangeiv: "You are missing an important point"

I'm not missing anything. The gathering companies who pay for the pipeline are putting up the capital. If you are right and they are wrong about the expected life of the wells, they'll lose money.

As I see it, they have skin in the game. You don't.

 
At 5/02/2012 2:04 PM, Blogger Jet Beagle said...

vangeIV: "Pipelines are usually depreciated over 25 years."

According to the American Gas Association:

"Natural gas transmission pipelines are depreciated over 15 years."

I haven't found any facts about depreciation of natural gas gathering pipelines. Gathering lines should have a shorter depreciable life than transmission lines.

Where did you get your 25 year fact, vangeIV?

 
At 5/02/2012 2:13 PM, Blogger Jet Beagle said...

vangeIV: "Pipelines are usually depreciated over 25 years."

I'd really like to know where you got this "fact", vangeIV.

According to this 2004 ruling by the Eight Circuit Court of Appeals, pipelines used for gathering natural gas should be depreciated over 7 years. Not 25 years, VangeIV. 7 years.

 
At 5/02/2012 2:17 PM, Blogger VangelV said...

I'm not missing anything. The gathering companies who pay for the pipeline are putting up the capital. If you are right and they are wrong about the expected life of the wells, they'll lose money.


That is my point. With depletion rates that have well pressures collapse after a year or two the costs are much higher than you can imagine.

As I see it, they have skin in the game. You don't.

I choose not to take risks on producers who are selling their product at half the break even cost. But it is doubtful that the people who run some of these companies have skin in the game. Their investors and creditors provide the skin. The management skims off their take for as long as they can and move on when the game is over.

 
At 5/02/2012 2:25 PM, Blogger VangelV said...

From a Shell conference call. Investors were told that pipelines had a 20-25 year life expectancy, which would go up if various preventive measures were taken. Of course that depends on the quality of product going through. It is possible that dirtier oil or gas would increase corrosion rates and 15 years is more appropriate.

As for the gathering system I go to the conference calls again. If companies are telling us that they can get a EUR that is based on 15 - 25 years of operation it is logical to assume that they expect those lines to be in place in the field for that time period. But even if you pick 15 years the huge depletion rates and negative cash flows are a serious problem. If your producers go bankrupt you will have a hard time getting much product going through after a while and could be looking at bankruptcy.

As I have pointed out before, anyone is free to buy what Mark is selling and make bets on shale gas and oil with their own money. Frankly, given the situation I would rather look elsewhere. By the way, between the very cold winter, the North Sea production declines, and the Libyan disruptions I suspect that Europe is going to have a very hard time getting enough oil and gas to meet its needs, even though demand is falling sharply. OPEC has very little spare capacity left and is facing domestic demand increases. That paints a bleak picture for the ability of new exports to lessen the price pressures and could throw Mark's positive spin for a loop.

 
At 5/02/2012 2:43 PM, Blogger VangelV said...

According to this 2004 ruling by the Eight Circuit Court of Appeals, pipelines used for gathering natural gas should be depreciated over 7 years. Not 25 years, VangeIV. 7 years.

We are talking about accounting rules. If I were a company and wanted to underreport a profit I could choose to depreciate an asset over as short a period as possible. Shorter is better. But if I wanted to make a process look profitable when it wasn't I would choose a much longer period, usually the useful life of the asset. Depending on the line you can probably use it for 25 years. If you used that period you can report a profit. But if the real life was much shorter you would be reporting negative cash flows over time and would have to eventually write down the value of the asset.

The best way to see what is going on is to look at the SEC filings and see what assumptions are being made. As I pointed out before, for the producers the EURs are about twice or three times higher than what the production data suggests is reasonable. That means that well construction costs are not being depreciated fast enough and that it is possible to be losing money but still report a profit until the write-down is impossible to avoid.

I suggest that you take a look at what happens in the sector. If prices begin to recover and the companies manage to get enough cash to let them operate for a few years longer I expect to see massive write-downs. We saw this during the tech bubble. This one is no different.

 

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