Shale Gas Boom – Meet Shale Gas Bust. It appears the hype about endless riches for companies spearheading the fracking of America is about to run right into the wall of reality at 100 mph. At this very moment the price for natural gas is currently $2.34/Mcf. This is a ten year low. It seems the laws of supply and demand still apply. When I saw this info, my initial question was what is the breakeven price for a shale gas well. You see it is costly and time consuming to frack. Millions of gallons of water, ponds, leasing the land, transporting the gas, labor, rigs, etc. Well I came across a number of articles on the interwebs. Here is a link to one:
Below is the key fact.
Shale gas operators have consistently told investors that their projects are profitable at sub-$5/Mcf (thousand cubic feet) natural gas prices. Yet company 10-K SEC filings show that this is untrue. They have invented a new calculus of partial-cycle economics that excludes major capital draws for land costs, interest expense and overhead. They justify these disclosure practices because excluded costs are either sunk or fixed and, therefore, supposedly should not affect their decisions to drill. Their point-forward plans are made at shareholder expense since the dollars spent were very real at the time, and their costs cannot be charged to a profit center other than the wells that they drill and produce.
A multi-year evaluation of production costs for ten shale operators indicates a $7.00/Mcf average break-even cost for shale gas plays in the U.S. taking hedging into account (Figure 1). In other words, shale gas plays are not low-cost but comparable to conventional and other non-conventional projects. Despite claims to the contrary, the gas-price environment has been favorable over this period, in part because of hedging, and poor performance cannot be blamed on price. Over-production has changed this dynamic and hedging will not benefit operators in the second half of 2010 or in 2011, and possibly not for several years forward. This emerging trend will test the shale gas business model and show that it is unsustainable. The same ten companies that we evaluated have cumulative debt of more than $30 billion of which three have combined debt of more than $20 billion.
A number of other articles also estimated the breakeven price at $7/Mcf. This means that any company fracking today is losing their shirt at $2.34/Mcf. If prices stay this low or go lower you will see rig counts drop and companies declaring bankruptcy. All the politicians counting on new jobs and increased tax revenues will be sorely disappointed. There is one thing that always happens with booms. They always go bust.
Natural Gas Keeps Tumbling, And Even Lower Prices Could Be On The Way
By Dan Strumpf
Is there any end to the free-fall that has gripped the natural gas market?
We’ve been following this bloodbath all week, which has gotten even worse today. Front-month February gas futures are down again for the eighth day in a row–trading down more than 5%. Recently they sank to 2.336 per million British thermal units, their lowest level since March 1, 2002.
That’s right, a 10-year low.
Today’s decline is driven primarily by a weekly inventory report from the Department of Energy. The report said U.S. natural gas stockpiles fell 87 billion cubic feet last week.
Gas inventories usually fall in the winter as homes and offices turn up their thermostats and burn more of the fuel. But the size of the draw is absurdly small. This time last year, inventories fell 228 billion cubic feet. The five-year average decline for the week is 162.
The reason: unusually warm temperatures have swept the country in recent months. And forecasters widely believe temps will stay high all winter. That means less fuel used for heating–and more fuel in storage.
Pax Saunders, analyst at the Houston firm Gelber & Associates, describes natural gas inventories this way: “It’s just an amazing millstone on the neck of the market.
So far this year, natural gas has lost more than 20% of its value. At some point, analysts say, natural gas producers will have to start curtailing production. But for many wells, pumping gas is so cheap that they can still afford to keep the taps on. Many produce a mix of gas, oil and other liquids, which offset the rock-bottom price of gas.
Which means that even lower prices could be on the way.