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:
http://www.theoildrum.com/node/7075
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
- Bloomberg
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.
Stranger in a strange land says:
The price is not stopping them from tearing up everything here in Oklahoma. Our groundwater is flammable, they are buying water from the city to pump down the wells and poison, then we have water usage bans in the summer. Helicopters and trucks buzz around these well sites like hornets, day and night, then we all of sudden have earthquakes big enough for me to sustain damage. At night you can look out upon the horizon and see no less than 22 drilling rigs.
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19th January 2012 at 1:17 pm
Nonanonymous says:
Over before it even started. The same can’t be said about H2O. Beware the water bottler who wants to drill a well on your neighbors land.
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19th January 2012 at 1:20 pm
Administrator says:
Stranger
Don’t worry. The corporate CEOs say it is safe. Everyone knows they never lie.
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19th January 2012 at 1:21 pm
Administrator says:
Video of shale gas investors.
http://www.wired.com/wiredscience/2011/11/starling-flock
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19th January 2012 at 1:21 pm
Wyoming Mike says:
Unintended consequence, for the first time in a long time Wyoming is in a budget crisis. It seems they heavily depend on tax revenue from Natural Gas. The price decrease has caused a budget shortfall.
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19th January 2012 at 2:06 pm
Persnickety says:
Short term gain, long term pain.
It’s the American Way.
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19th January 2012 at 2:29 pm
Kill Bill says:
Im sure the serious folks in DC will find a crisis to push the price back up.
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19th January 2012 at 2:36 pm
Kill Bill says:
Administrator says: Video of shale gas investors.
Murmuration. I have a feeling the herd reacts to rumurmuration.
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19th January 2012 at 2:41 pm
Anonymous says:
Oil wells do not only produce oil, they generally also produce some natural gas as well as other fluids.
Natural gas wells also produce more products than natural gas. They produce NGL’s, natural gas liquids like ethane, etc. These NGL’s are very valuable and are stripped out of the natural gas stream and sold separately. I suspect these products are whats keeping the gas wells profitable.
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19th January 2012 at 3:21 pm
TeresaE says:
Here is what I take away from this:
1. Get ready to have no money in the future to live. If breakeven is closer to $7, then someday in the future when our currency is worth nothing, that is the price we will be vying against the world to heat our homes and dry our clothes. The rest of the world will gladly pay our corporations to use up our natural resources. After all, isn’t that exactly what the US has done world wide? Once the currency game ends badly, this doesn’t bode well for American citizens daily living standards. Third world, here we come.
2. There are a thousand ways to hide the truth on corporate “profits” and results. Thousands of ways. From the banks that are making “profit” on accounting entries, to the drillers that are making “profit” on not correctly associating actual costs with actual production, it is now evident that NO accounting statements can be viewed as “evidence” of anything. None of them.
Number 2 really hits me hard. Long ago, I once entered accounting because the “fact” that “numbers can’t lie” really appealed to me. Too bad reality has proven that a “fact” I based many of my beliefs on is nothing but bogus, lollypop wishing, lies and crap. Just crap.
Once more we have decided as a nation to set forth the policy of Lie, Confuse and Coverup, instead of sticking to the path of the truth and morality.
The truth could set us free, but with the majority benefiting from bullshit (especially the elite), there is less than a zero percent chance of us CHOOSING to live in the light.
No wonder the fucking world hates us. We bomb, invade and sanction under the guise of bringing “freedom and democracy,” yet, the whole world can see that we are nothing but a bunch of lying, corrupted, lazy and apathetic fat fucks that do the bidding of our corporate masters.
I can’t blame them.
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19th January 2012 at 3:45 pm
Administrator says:
Party on Garth!!!
http://www.bloomberg.com/news/2012-01-19/frack-market-to-grow-19-in-2012-to-37-billion-correct-.html
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19th January 2012 at 4:12 pm
Sensetti says:
Thanks admin
They also over book the reserves and then borrow against future gas sales that don’t exist and never will. Another con job, it’s the American way
Sensetti
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19th January 2012 at 8:30 pm