U.S. ENERGY INDEPENDENCE

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Posted on 25th September 2012 by Administrator in Economy |Politics |Social Issues

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Listening to the two clowns running for President discussing energy policy is like listening to those babies on the internet babbling jibberish as if it means something. One clown babbles about renewable energy and green jobs. The other clown babbles about drill, drill, drill and 100 years of supply under our feet. These two lying sacks of shit are telling the American public that America can and will be energy independent any day now. You see stories in the MSM that we have become a net exporter of “petroleum products”. The clueless masses thinks this means we have an excess supply of oil. What it means is that our economy is so bad, we have gasoline left over to sell other countries because we don’t have enough business to generate demand in this country.

The fact is that the United States uses 18 million barrels of oil per day. We import 10 million barrels of oil per day. We export 2 million barrels of petroleum products per day. We extract 5.7 million barrels per day from our soil. Do these facts support the idea of energy independence in the near future? Ever?

Is fracking going to save the day? When was the last time you filled up your tank with shale natural gas? How will our glut of shale gas save us? I haven’t seen the plans for converting gas stations and vehicles to natural gas. Have you? Obama wants you to plug your cars into an outlet and use coal to power your cars. The 2,000 Chevy Volts that Government Motors has sold this year will surely save the country from Big oil.

The dishonesty and lies spewed by both parties regarding U.S. energy independence benefits no one. An honest discussion about the implications to our society of much more expensive energy is too much to ask in the land of delusion.

DON’T WORRY, DRIVE ON: Fossil Fools & Fracking Lies from MONSTRO on Vimeo.

 From both political parties come cliches on energy policy

Monday, September 24,2012

 

We’ve heard it all before. Over and over for most of the last 40 years.

From politicians of both parties, cliches and nonsense on energy. Take the biggest cliche of all: U.S. energy independence. The candidates are all for it. Mitt Romney says he’ll make us independent by 2020, conveniently at the end of his second term. President Barack Obama says the route to energy independence is an “all-of-the-above” strategy and a “doubling-down” on renewables, especially if, as Obama has argued at various times, we have “Apollo” programs for new energy technologies.

These pronouncements are imprecise to the point of being meaningless.

Virtually any policy could be attached to the slogans, and their interminable restatement seems mainly an effort to produce a few uplifting sound bites on the evening news.

So Romney and his running mate, Paul Ryan, R-Wis., are for U.S. energy independence.

How original! This has been proposed by, well, just about every politician since Richard Nixon. He came up with the idea in 1973 (to be achieved by 1980). Romney’s only innovation is an eight-year time frame and he has called for “North American energy independence,” to include Canada and Mexico, both major energy exporters. Nixon wanted independence in seven years, but since Gerald Ford, the standard energy independence time frame has been 10 years. When Ford’s aides first looked into the matter, they felt their first goal was to redefine “independence” and their second was to redefine “10 years.”

The pained effort to define energy independence has been ongoing. In the 1970s Nixon’s (and Gerald Ford’s) Treasury Secretary William Simon thought energy independence meant having diversified sources of oil supply. By that definition we’ve been energy independent for about 25 years.

I have no idea what Romney means by it, especially since he seems to want us to only be independent of such countries as Venezuela (at least under Hugo Chavez) and of the Middle East.

Of course, the simplest definition is one Nixon first used: We would only use energy supplies produced in and by the U.S. This is possible; we could forbid imported energy supplies. Period.

It would also be almost unspeakably stupid. It would mean, for example, if world energy prices were low, we would forcibly lower our standard of living and put American firms at a great competitive disadvantage by choosing expensive energy over cheaper. No doubt other nations would send us a “thank you.” Complete energy self-sufficiency was tried in Romania under the Communist dictator Nicolae Ceausescu.

Ask any Romanian who lived through that time how well the experiment worked out; you won’t get a recommendation.

A few politicians and pundits argue that our engagement in the global energy market does cost us. That is why we went to war, in 1991, most notably. But does anyone seriously believe the U.S. (the world’s only military superpower) would just stand aside while the global economy fell to pieces because of a major disruption of the oil market?

Of course, Obama also touts energy independence on his campaign website along with a few new imprecise energy slogans.

“All-of-the-above,” for example, could mean “anything-I-like-to the extent-I-like it.” “Doubling-down” could mean spending twice as much money as we already have or just reinforcing some nebulous commitment with twice as much rhetoric, uttered twice as loudly.

Obama also has the burden of having spent billions of taxpayer dollars already on his fantasies of renewable energy “Apollo” programs, programs that were supposed to create millions of “green jobs.” Like energy independence, as studies have shown, it’s unclear just what constitutes a green job.

What is really unfortunate about the president’s policies is that he could actually do some good on the energy front by ordering the Environmental Protection Agency to suspend the pernicious Renewable Fuel Standard — a.k.a. the ethanol mandate. He could even blame George W. Bush since the 2007 ethanol bill was one Bush strongly endorsed.

Then again so did Sen. Barack Obama and many other Democrats in Congress.

Of course, that bill had a lofty goal beyond ethanol: As House Speaker Nancy Pelosi described it, this was the U.S. “energy independence day” bill.

And who opposes that?
Peter Z. Grossman is a professor of economics at Butler University in Indianapolis and the author of “U.S. Energy Policy and the Pursuit of Failure.”

THIS BUST SHOULD BE A DOOZY

111 comments

Posted on 24th June 2012 by Administrator in Economy

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Automatic Earth with another reality check on the shale gas BOOM!!!

Let’s see – tremendous levels of debt, hype times infinity, Wall Street shysters, douchebags like Aubrey McClendon, delusional drillers, record low prices, high drilling costs, and low EROEI. Sounds like a perfect combination.  

Shale Gas Reality Begins to Dawn

SUNDAY, JUNE 24, 2012  2:30 PM

It has long been our position at The Automatic Earth that North America is collectively dreaming with regard to unconventional natural gas. While gas is undeniably there, the Energy Returned On Energy Invested (EROEI) is dramatically lower than for conventional supplies. The critical nature of EROEI has been widely ignored, but will ultimately determine what is and is not an energy source, and shale gas is going to fail the test.

As we pointed out in Get Ready for the North American Gas Shock in July 2011, the natural gas situation is not what it seems at all:

The shale gas bubble is a perfect example of the irrationality of markets, the power of perverse short-term incentives, the driving force of momentum-chasing, the dominance of perception over reality in determining prices, and the determination for a herd to stampede over a cliff all at once.

The perception of a gas glut has driven prices so low that none of the participants are making money (at least not by producing gas) or creating value. We see a familiar story of excessive debt, and the hollowing out of productive companies dead set on pursuing a mirage.

Many industry insiders know perfectly well that the prospects for recovering substantial amounts of gas are poor, and that the industry is structured as a ponzi scheme. Still, there has been money to be made in the short term by flipping land leases and building infrastructure to handle gas.

The hype is so extreme that those who fall for it contemplate, in all seriousness, North America becoming a natural gas exporting powerhouse, and a threat to Australian LNG producers, or to Russia’s Gazprom.

This concept, constructed from a mixture of greed and desperation (at the lack of conventional gas prospects), is entirely divorced from reality. (See here for Dimitri Orlovs excellent piece on why Gazprom has nothing to worry about.)

Nevertheless, euphoric hype is extremely catching. Given that prices are driven by perception, not by reality, hype has the power to change the dynamics of an industry, exaggerating boom and bust cycles in practice. The hype has resulted in the perception of glut – that North America is drowning in natural gas. The inconvenient fact that this peception is completely wrong does not alter its power in relation to prices.

Natural gas companies gambling on shale gas have been facing prices so low – far below the cost of production – that all of them have been producing gas unprofitably. The financial risk has been increasing dramatically as the companies have been drowning in debt trying to ride out the rock bottom prices that have been the result of people believing the fantasy. Finally, casualties of the financial shenanigans involved are emerging. It is very likely that there will be many more, as companies that have tried to ride out the low prices go under.

Wolf Richter:

Natural Gas: Where Endless Money Went To Die

Alas, thanks to the Feds zero-interest-rate policy and the trillions it has handed over to its cronies since late 2008, the sweeps of creative destruction have broken down. Instead, boundless sums of money have been searching for a place to go, and they’re chasing yield when there is none, and so theyre taking risks, any kind of risks, in their vain battle to come out ahead.

The result is a stunning misallocation of capital to the tune of tens of billions of dollars to an economic activity drilling for dry natural gas that has been highly unprofitable for years. It’s where money has gone to die. What’s left is debt, and wells that will never produce enough to make their investors whole.

But the money has dried up. And drilling for natural gas is collapsing. Last week, there were only 562 rigs drilling for dry natural gas, the lowest number since September 1999…

 

…At $2.53 per million Btu at the Henry Hub, the price of natural gas is up 33% from the April low of $1.90 per million Btu, a number not seen in a decade.

.But even if it doubled, it would still be below the cost of production. And if it tripled, it might still be below the cost of production for most producers. That’s how mispriced the commodity has become.

More from Wolf Richter:

Dirt Cheap Natural Gas Is Tearing Up The Very Industry That’s Producing It

The economics of fracking are horrid. All wells have decline rates where production drops over time. But instead of decades for traditional wells, decline rates in horizontal fracking are measured in weeks and months: production falls off a cliff from day one and continues for a year or so until it levels out at about 10% of initial production. To be in the black over its life under these circumstances, a well in the Barnett Shale would have to sell its production for about $8 per million Btu, pricing models have shown.

…Drilling is destroying capital at an astonishing rate, and drillers are left with a mountain of debt just when decline rates are starting to wreak their havoc. To keep the decline rates from mucking up income statements, companies had to drill more and more, with new wells making up for the declining production of old wells. Alas, the scheme hit a wall, namely reality…

…The natural gas business is brutal. The peak in drilling occurred in September 2008 with 1,606 rigs. Then the financial crisis threw it into a vertigo-inducing plunge. After last years mini-peak, the plunge continued…

…Production lags behind rig count, and while rig count for gas wells has been setting new decade lows, production has been rising month after month to new record highs. But lagging doesn’t mean decoupled. And someday…. Oops, it already happened. It has started. Production has turned the corner, and not just in one field, but across the US.

 

Its still just a little notch in the curve. But its a sign that the collapse in rig count is translating into lower production numbers. And when the steep decline rates are beginning to overlap the drop in rig count, production will head south in a dizzying trajectory.

Money has been thrown at the industry, but the notion is dawning that the game is up and that returns will never materialize. The ponzi scheme has reached its natural limit, and investors are waking up to the realization that they have been chasing a fantasy.

Ironically, just as the washout begins, natural gas prices may have bottomed. Conventional natural gas in North America peaked in 2001. Coal bed methane and now shale gas have been revealed to be massively overblown as an energy source. Producers are reaping the consequences of malinvestment and will be going out of business. Demand has been building with the transition from coal to natural gas for power generation. This is an ideal set up for a supply collapse and subsequent price spike.

North America is poised for a huge natural gas shock. Far from being an exporter, North America is going to experience a natural gas supply crunch. Prices will be rising at the same time as peoples purchasing power falls precipitously, thanks to deflation. The structural dependency on natural gas that has been cemented in recent years is going to guarantee maximum pain as prices reconnect with reality.

SHALE GAS BOOM!!!

5 comments

Posted on 22nd June 2012 by Administrator in Economy

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It’s certainly made a few individuals wealthy. But, we all know how it will end. The poor rural folks in Western PA will be left with contaminated water wells, streams and ponds. Once the gas is extracted, these mega-corporations will exit stage left. When people start dying mysteriously from various cancers, the mega-corporation lawyers will fight the claims tooth and nail. We’ve all seen this show before. The politicians who didn’t require and regulation of these drillers will leave “public service” and take jobs with these gas companies. 

In Western Pennsylvania, an Energy Boom Not Visibly Stifled

By

SMITHFIELD, Pa. — From his farm nestled far from the big cities, in the wooded hills above the Monongahela and Cheat Rivers, David Headley has not heard much about the battles in Washington over regulations that Republicans say are stifling a domestic energy revolution.

At the ground level of that revolution Mr. Headley, a 53-year-old former body shop owner and unemployed bus driver, does not see any regulations at all.

For three years, he and his wife, Linda, have wrestled with the land men, natural gas drillers and pipeline builders who are turning this very sleepy corner of Western Pennsylvania into an energy boom land. The farm Mr. Headley bought in 2006 for his semiretirement has become something of a nightmare. Gas wells leak. Drilling blowouts have spewed fine, chalky bentonite into trout-stocked Georges Creek, turning it a milky white. A spring where his wife’s three horses once watered now bubbles and belches. Touched with a flame, it will ignite.

The Headleys blame the men who worked on the drilling platform in their front yard for the disappearance of their beagle, Sarah. Linda had to rescue their remaining dog, Banjo, from a sludge pond, leaving her hands cracked and burning for six months.

And last month, a dispute over an $11,000 payment for a pipeline right of way ended with state troopers, guns drawn, pouring out of 10 patrol cars and accusing Mr. Headley of criminal trespassing on his own land. A judge forced the gas company to pay the money — and slapped Mr. Headley with an injunction to keep 50 feet from the pipeline running through his property.

“They’re doing whatever they want, whenever they want to,” he said, shaking his head as he walked by the shale gas well head and separation tanks humming in sight and earshot of his front porch.

For more than a year now, Republicans in Washington — and Mitt Romney on the stump — have been pressing the case that the Obama administration is trying to squash an energy boom already well under way, fostered by the technological development of hydraulic fracturing, or fracking.

On Thursday, the House will vote on a broad bill to streamline the energy permitting process on federal lands and direct the administration to establish production objectives for oil, gas, coal and oil shale — part of a broader effort to establish Republicans as champions of domestic energy. On Wednesday, the Senate voted down a Republican bill to stop new regulations on utility emissions.

“We have these Big Government policies out of D. C. that are turning off the lights,” said Keith Rothfus, a Republican House candidate in a newly drawn Western Pennsylvania district he calls “America’s new energy capital.”

But to make that case, Republicans will have to convince voters in regions like Western Pennsylvania that the free-for-all they see all around them could somehow be even more, well, free. It is a tough sell.

“It’s the Wild West,” said C. J. Callahan, a 29-year-old banker in Point Marion, grabbing dinner with his wife and newborn baby at Apple Annie’s, just down the road from the Headleys. “There aren’t regulations. It’s just, get it out as quick as you can, because they’re going to do the regulations down the road.”

The natural gas industry is toeing the same difficult line, boasting of its explosive growth while warning of the dangers to come. A study released this month by America’s Natural Gas Alliance, a trade group, concluded that unconventional natural gas activities — like oil shale fracking — employed one million Americans in 2010, and that employment would grow to 1.5 million by 2015 and to more than 2.4 million by 2035.

Between 2010 and 2035, the gas boom will generate nearly $1.5 trillion in federal, state and local taxes and royalty revenues, the economic firm IHS predicted.

Early last year, Western Pennsylvania’s Washington County chalked up the third-fastest growth among the country’s 322 largest counties. Just to the north, Butler County ranked sixth. Between those two, Beaver County could soon be the site of a Royal Dutch Shell ethane cracker, a billion-dollar plant that breaks down the gas ethane into the more valuable industrial compound ethylene.

Even the federally owned Allegheny National Forest is open for gas business, industry officials say.

“It’s unbelievable, the opportunity,” said Frank Puskarich, 58, a Washington County former coal miner who in five years has seen his mobile Hog Father’s Bar-B-Que expand to three trucks and three trailers traveling four states to cater to the natural gas trade. “And it’s not just me. It’s leather makers, grocery stores, truck drivers, guys with dump trucks.”

Yet, the industry also says, a looming Environmental Protection Agency study on fracking and a cumbersome Army Corps of Engineering permitting process are creating uncertainty, turning some of the public against gas.

“We certainly haven’t met the potential,” said Kathryn Klaber, president of the Marcellus Shale Coalition, a Pittsburgh-based industry alliance pressing for development of the vast Marcellus shale “play” that stretches from West Virginia to upstate New York.

The fortunes to be made have salved the headaches and heartaches in this stretch of Gasland. The Headleys are the unlucky ones. The wells on their property are spinning off an estimated $20,000 a month in royalties — not for them, but for the New Jersey man who sold them the property, but kept the gas rights.

Still, whole towns have been woken from the dead.

Stanley E. Cree, 81, said trucks rumble by his house in Waynesburg 24 hours a day.

“Oh hell, yes, it’s helped a lot of people,” he said. “Heck, I’ve made a small fortune myself.”

The 50 acres he bought long ago for $3,500 an acre is now selling for $33,600. He has sold 10 or 12 of them, he figured, plus pipeline rights of way for an additional $300,000.

Mr. Headley said the drilling foreman on his property told him he had drilled all over the world but never in a place easier than Pennsylvania: “Ask for what you want and you’ll get it,” he quoted the driller.

Matt Pitzarella, a spokesman for the Range Resources Corporation, the discoverer of the Marcellus play, bristled at the term “Wild West.” He pointed out the stone verge along the gravel road leading down from a bustling fracking operation in Washington County, the rubber tarmac, the resodded hillside and the emergency “spill kits” — all required by the Pennsylvania Department of Environmental Protection.

“Anyone suggesting a lack of regulations for this industry in Pennsylvania is a fool,” he said.

But beyond the frack pads and drilling wells, it appears to be easier to find voters here worried more about too little regulation than too much.

Joe Bezjak, a retired junior high school principal in Nicholson Township, called the notion of overregulation “ludicrous.” In fact, he said, the whole region is bought and paid for by the gas men. Last month, police officers handcuffed him at gunpoint after a foreman on his property accused Mr. Bezjak of threatening him in a dispute over the farm’s electric fencing that had been repeatedly torn down by pipeline builders.

“I had a peaceful, loving life,” Mr. Bezjak, 73, said. “Believe me, I haven’t had many enjoyable days since these people have been around.”

SHALE GAS BOOM ABOUT TO GO BUST

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Posted on 12th February 2012 by Administrator in Economy |Politics |Social Issues

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Well this boom didn’t last long. That law of supply and demand sure is a bitch. Maybe Romney will bailout the natural gas numbskulls when their companies go belly-up because they borrowed too much and drilled too many wells. You don’t get truthful, factual, reasonable articles like this in the MSM – only on websites like http://www.theoildrum.com/.

Gas Boom Goes Bust

Posted by Jonathan Callahan on February 6, 2012 – 10:15am
Topic: Supply/Production
Tags: futures, natural gas, shale gas, united states [list all tags]

The current boom in drilling for ‘unconventional’ gas has helped raise US production to levels not seen since the early 1970′s. This has been an incredible boon to consumers and has kept spot prices contained below $5 per million BTU for the past year, recently dropping below $3/mmbtu. Unfortunately, this price is below the cost of production for many of these new wells. When the flood of investment currently pouring into natural gas drilling operations dries up, the inevitable bust will be as scary as the boom was exciting.

 

The Problem

A well written and realistic overview of the situation appeared in a Dec. 6, 2011 article in Rigzone: Musings: Imagining The Future for The Natural Gas Industry. In this article, author G. Allen Brooks focuses on the damaging impact low natural gas prices have on the industry. The following excerpt captures the main message of the article:

Gas shale wells are expensive to drill and complete as well are the cost of the leases on which they are drilled. Even though initial gas production from shale wells is huge, the low price has depressed the amount of cash companies are receiving. As a result, producers are spending well in excess of their cash flows. To supplement cash flow, producers have engaged in every known trick in the finance book to boost available funds. These tactics include hedging forward future production whenever high prices are available, tapping Wall Street to raise equity and debt, and seeking out relationships such as joint ventures with larger, and often foreign, oil and gas companies.

In order to access Wall Street capital, producers have needed to demonstrate that they are being successful in exercising a strategy for aggressive wealth creation. That means aggressively buying acreage and drilling wells. Exercising a successful strategy often creates a vicious cycle – more acreage and wells equals increased production and depressed prices. This cycle will continue as long as the music (Wall Street’s money) continues to flow. Once that stops, we will see how many producers can find a chair in the room. In the meantime, the fun continues!

Let’s review the pertinent facts and big trends to try to understand the situation and get a sense of the most likely outcomes.

The Backstory

In recent years, the news media have contained lot of hype and misinformation about energy issues. Energy reporting is plagued with incorrect/inconsistent use of units, misleading charts and a general lack of critical thinking. In order to put the current natural gas crisis in context we need to understand the role of natural gas in the United States economy. A review of publicly available data can help provide unbiased answers to several key questions.

Question 1) How does natural gas figure into our overall energy consumption?

Figure 1) from the Energy Export databrowser shows US energy consumption of the five primary sources of energy: nuclear, coal, oil, gas and hydro-electric. Data are in consistent units of “million tonnes of oil equivalent” (mtoe) as provided in the British Petroleum Statistical Review. [1] The general trend toward increased energy consumption is obvious as are dips due to the 1973 and 1980 oil crises as well as the economic crash in 2008. Initial data for 2010 show a return to increased consumption following the massive injection of Federal stimulus money. We can also see that oil is the primary source of energy in the United States and that natural gas has recently outpaced coal in importance. In 2010, natural gas accounted for 30% of total energy use.

Figure 1) US consumption of energy from primary sources.

Question 2) What is the balance of production and consumption for natural gas?

Figure 2) uses the difference between production and consumption data to estimate net imports/exports of natural gas. Production matched consumption throughout the 70′s and 80′s. Since 1990, the US has had a pretty steady import habit with almost all of the imports coming from Canada. [2] Production has been increasing quite steadily since 2006 but we have also seen increased consumption some years resulting in only a small decrease in imports. Nevertheless, it would only take a modest conservation effort for the US to become “energy independent” with respect to natural gas. Unless, that is, more consumption switches from using oil as a fuel to using natural gas. As we saw in Figure 1), replacing even a fraction of our oil use with natural gas would quickly overwhelm US natural gas supply.

Figure 2) Production (gray), consumption (black line) and imports (red) of natural gas.

Question 3) How is natural gas used in the United States?

The US Energy Information Administration has data on Natural Gas Consumption by End Use. Figure 3) shows the categories tracked by the EIA along with one more that appears to be planning for the future. Natural gas vehicles currently account for only 0.14% of total consumption.

Figure 3) US Natural Gas consumption by sector.

Question 4) How have natural gas prices evolved?

Figure 4) brings together data from three different EIA datasets [3] It is clear that prices before the year 2000 were relatively stable compared with prices after 2000. The increase in drilling rig activity after 2000 is also evident along with a significant increase in marketed production of natural gas beginning in about 2006.

Figure 4) US Natural Gas Production, Active Rigs and Wellhead Price

It’s worth having a closer look at the period since 2000 as seen in Figure 5). Here we can see how the number of active rigs often closely follows the price with a 6-12 month delay. The connection between number of rigs and production is less obvious but it seems clear that the sustained rise in active rigs after about 2002 has been responsible for the steady increase in production since 2006. Surprisingly, the rapid drop-off in drilling activity since 2009 has yet to result in any decrease in production.

A detailed explanation of the four price spikes seen in the chart is given in a March 6, 2009 Oil Drum post: The Anatomy of a Natural Gas Price Spike – Past and Future.

Figure 5) Natural gas production, rigs and price since 2000.

Question 5) How much natural gas is in storage?

According to the EIA Short Term Energy Outlook, a warm winter has left the use US with record amounts of natural gas in storage for this time of year. Figure 6) shows that the US is currently above the upper range of historical levels and are projected to stay there. Nothing is certain, of course. A disruptive hurricane, a bitterly cold and extended winter, or a punishing summer heat wave could bring storage back down. But without any of these extreme-weather events the EIA is projecting that the natural gas glut will continue for at least the next two years.

Figure 6) Natural gas storage levels.

The Finance Story

As is evident in the graphs above, a recent increase in natural gas production, combined with decreased consumption due to a warm winter, is leading to a supply demand imbalance and very low prices in the United States. The question that now arises is: To what extent can current prices support additional drilling? To answer this question, we need to understand how energy companies use the markets to hedge — to sell product forward to lock in a price.

Question 6) How does ‘hedging’ work?

Drilling a natural gas well takes time, typically from 3-6 months from spudding until completion. When drilling begins, companies have an estimate of what it will cost to complete a well. If they hire talented geologists, they will have a reasonable guess as to the amount of natural gas they hope to find. What they don’t know is what price that natural gas will command 6 months – 2 years down the road. For this they have two options: 1) gamble that the price in a year will be high enough to generate a profit; or 2) ‘hedge’ by selling production forward on the futures market.

There is always a market today for natural gas that is to be delivered in the future. (Henry Hub natural gas futures). The sellers of these futures contracts are the natural gas producers who want to guarantee a price minimum. The buyers of these futures contracts are typically large consumers of natural gas like power plants who want lock in a price maximum. It’s basically the same thing as buying a season’s worth of heating oil at a fixed price the summer before the winter heating season.

We can do a little time traveling by looking at what the futures contracts for natural gas were two years ago when the now 1-year-old producing wells were first penciled out on corporate balance sheets. A futures chain simply connects the futures contracts for one month out, two months out, etc. to form a continuous chain when plotted. Figure 7) shows futures chains for natural gas leading up to January 23, 2010. On that date, the futures chain had a seasonal cycle which shows that natural gas prices are generally expected to go up for the winter heating season and then down in the spring. Figure 7) also shows what was expected at that time to be a generally increasing price trend.

Figure 7) Natural Gas futures chain from Jan 23, 2010.

On January 23, 2010, natural gas for delivery in February of 2012 could have been hedged (sold forward) at ~ $7/mmbtu and would have generated a tidy profit if well completion costs ended up in the $4/mmbtu range. (Please note that futures prices are given per million BTU while production is given in units of thousand cubic feet. The conversion factor depends upon the gas stream but is typically somewhere between 1020-1100 BTU/standard cubic feet. A very rough conversion is 1 thousand cubic feet (kcf) ≈ 1 million BTU (mmbtu).)

Things looked a little different in late January, 2012 as seen in figure 8). On January 22, 2012, if companies hedged 100% of their production 6-24 months out they would have gotten less than $4/mmbtu in February 2014.

Figure 8) Natural gas futures chain from January 22, 2012

To make things clearer, lets take a look at the evolution of a single futures contract — the four-month futures contract. If you started drilling a well today you might hope to have significant production in four months and could lock in a price with the four-month futures contract. Figure 9) shows how the price of that contract has evolved over the last two years, briefly touching $4/mmbtu on a few occasions before moving decidedly lower on October 15, 2011.

Figure 9) Evolution of natural gas four month futures contract.

Question 7) Who can make money at these prices?

From figure 4) we know that prices below $4/mmbtu were typical before 2000 but very rare since then. Given our lead off quote’s contention that “gas shale wells are expensive to drill and complete” we need an assessment of which shale gas plays can turn a profit when prices are below $4/mmbtu.

Luckily, Goldman Sachs already did this analysis as reported in a recent presentation by Range Resources. (I would encourage anyone interested in shale gas production and finance to look at this report. While I am often skeptical of corporate reports, this presentation answered a number of questions with detailed information and charts.) Slide 11 from this report contains information from the Goldman Sachs report on the NYMEX price required to produce a 12% Internal Rate of Return — the threshold for a project to receive financing. Transcribing the information from the Range Resource presentation and adding on $3/mmbtu and $4/mmbtu thresholds paints a rather ugly picture for the shale gas industry today as seen in figure 10).

A detailed and even less optimistic study of well performance and potential profitability in various shale gas plays also appeared in an August 5, 2011 Oil Drum post: U.S. Shale Gas: Less Abundance, Higher Cost.

Figure 10) Relative profitability of various shale gas plays

The Bust

The situation depicted in figure 10) is not just theoretical.With current spot and future prices below the cost of production, some companies are in trouble. Here are some newsworthy items to convince you that the jig is up — whatever the President said in the State of the Union speech.

Jan 20: Form 8-K for EQT CORP

In light of lower natural gas prices, the resultant reduction in projected cash flow, and consistent with its determination to live within its means financially, EQT Corporation has decided to suspend development in the Huron indefinitely.

Jan 23: Natural gas glut, low prices, prompt Chesapeake to cut exploration and production

Faced with decade-low natural gas prices that have made some drilling operations unprofitable, Chesapeake Energy Corp. says it will drastically cut drilling and production of the fuel in the U.S.

Jan 24: Prices continue to slide on gushers of natural gas

“It would not surprise me to see gas prices below $2,” Schenker said. “If supply continues to outstrip demand in a massive way throughout the year, it’s going to be hard to find a bottom for the market.”

Jan 26: Carbo Ceramics down almost 20% following disappointing earnings report

Noting “challenges beyond typical seasonality,” the company said the severe decline in natural gas prices during the quarter led E&Ps to reduce capital spending, leading to a sequential reduction of about 70% in its Haynesville proppant sales volumes.

Jan 30: Comstock to focus drilling on oil plays

US producer Comstock Resources has become the latest gas-focused player to shift its investment away from natural gas amid low prices.

Jan 30: Natural gas price drops after Energy Dept. report shows supplies well above 5-year average

Barring any unseasonable swings in the weather, natural gas companies likely will trim production by another 2 billion cubic feet per day this year, independent energy analyst Stephen Smith said.

The Consequences

Clearly, low prices are going to affect many in the industry. But that is not all. Low gas prices put pressure on other sources of energy used to produce electricity. Natural gas competes against coal and wind and solar photovoltaics and is now the lowest cost provider. We should expect 2012 to be a year in which we see a variety of knock-on effects:

  • Natural gas producers and investors with poor hedge books and too much debt will end up in bankruptcy court.
  • Drilling operations will focus on liquids-rich plays only.
  • Jobs creation in the natural gas drilling industry will fall well short of expectations.
  • Several older coal-fired plants will close.
  • New wind power generation will fall — especially if the production tax credit is not extended.
  • Natural gas fueled fleet vehicles should become more popular.

Low gas prices will have positive and negative ripple effects throughout the economy. The final question one has to ask is: “How long will prices stay this low?” And that is one for which there is simply not enough public information available. It would take a serious accounting effort, using the production stats from all producing gas wells to make some decent estimates about decline rates.

The bottom line is that natural gas is a cyclical industry which recently enjoyed a very large boom. As night follows day, a bust is sure to come. Based on the information presented above, I would humbly submit that it has just arrived.

 

Footnotes:

  1. In Figure 1) the primary energy values of both nuclear and hydroelectric power generation have been derived by calculating the equivalent amount of fossil fuel required to generate the same volume of electricity in a thermal power station, assuming a conversion efficiency of 38% (the average for OECD thermal power generation). [↩]
  2. EIA — US Natural Gas Imports by Country [↩]
  3. Data for Figure 4) include EIA datasets: Gross Withdrawals and Production, Crude Oil and Natural Gas Drilling Rig Activity, and Prices. [↩]

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14 comments

Posted on 6th January 2011 by Administrator in Economy |Politics |Social Issues

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The story below was in my local paper and I just about blew a gasket after I read it. Pennsylvania is having a shale gas boom in the northwest part of the state. The Marcellus Shale blankets this part of PA. There is a frenzy of drilling companies making millions and leaving devastation in their wake. They drill on people’s properties while they continue to live there. It is well known and documented that people’s well water has been contaminated to the point that their spigot water can be set on fire.

I thought these problems were hundreds of miles away from my house, but now I know differently. The wastewater from this fracking method of obtaining shale gas is filled with carcinogens, chemicals, and is seven times as salty as ocean water. PA has had virtually no rules or regulations for the disposal of this toxic brew. Cabot Oil & Gas trucked more than 44,000 barrels of well wastewater to a treatment facility in Hatfield Township. Those liquids were then discharged through the town sewage plant into the Neshaminy Creek, which winds through Bucks and Montgomery counties on its way to the Delaware River.

Hatfield is only 5 miles from my house. They just dumped this shit into the creeks around my house. This is where our drinking water comes from. This is where the difference between a Republican and a Libertarian becomes clear. Republicans think corporations can do no wrong and that the market will regulate itself. Therefore, no rules, regulations or laws are necessary. Libertarians believe in the rule of law. If you cause harm to others, you should be imprisoned, fined, or punished.

Destroying the lives of human beings by dumping toxic wastewater into streams and rivers is criminal in my humble opinion. Contaminating well water and then denying you did so and accepting the consequences is criminal in  my humble opinion. These corporate executive scumbags need to pay for their crimes. They have their PR snakes spinning and lying and spewing mistruths in their efforts to enrich themselves. If pouring 44,000 gallons of toxic sludge into a creek isn’t dangerous to the public, as claimed by Cabot, then how about this:

I want the CEO of Cabot Oil & Gas, his wife, his kids, his executive team and their families to go one mile downstream on the Neshaminy Creek and wait until they release the 44,000 gallons of “non-harmful” waste water upstream. Then I want them to start drinking the water as it flows past them. Then I’d want them to have to drink the water from that stream everyday for the next 10 years. Would these pricks agree to that? No fucking way.

These shale gas wells across PA are depleted rapidly. You can bet that in 10 years, this section of PA will be a wasteland of toxic ponds, contaminated well water, and depressed real estate prices inhabited by poor people who shockingly are getting cancer at a rate 50 times higher than expected. The scum who run big corporations in America need to be strung up by their balls.

Gas boom has major downside in Pennsylvania

By AP

The Hatfield Township Municipal Authority plant, in Colmar. (AP photo)

The natural gas boom gripping parts of the U.S. has a nasty byproduct: wastewater so salty, and so polluted with metals like barium and strontium, most states require drillers to get rid of the stuff by injecting it down shafts thousands of feet deep.

Not in Pennsylvania, one of the states at the center of the gas rush.

There, the liquid that gushes from gas wells is only partially treated for substances that could be environmentally harmful, then dumped into rivers and streams from which communities get their drinking water.

In the two years since the frenzy of activity began in the vast underground rock formation known as the Marcellus Shale, Pennsylvania has been the only state allowing waterways to serve as the primary disposal place for the huge amounts of wastewater produced by a drilling technique called hydraulic fracturing, or fracking.

State regulators, initially caught flat-footed, tightened the rules this year for any new water treatment plants, but allowed any existing operations to continue discharging water into rivers.

At least 3.6 million barrels of the waste were sent to treatment plants that empty into rivers during the 12 months ending June 30, according to state records. That is enough to cover a square mile with more than 8½ inches of brine.

Researchers are still trying to figure out whether Pennsylvania’s river discharges, at their current levels, are dangerous to humans or wildlife. Several studies are under way, some under the auspices of the Environmental Protection Agency.

State officials, energy companies and the operators of treatment plants insist that with the right safeguards in place, the practice poses little or no risk to the environment or to the hundreds of thousands of people, especially in western Pennsylvania, who rely on those rivers for drinking water.

But an Associated Press review found that Pennsylvania’s efforts to minimize, control and track wastewater discharges have sometimes failed.

For example:

Of the roughly 6 million barrels of well liquids produced in a 12-month period examined by The AP, the state couldn’t account for the disposal method for 1.28 million barrels, about a fifth of the total, due to a weakness in its reporting system and incomplete filings by some energy companies.

Some public water utilities that sit downstream from big gas wastewater treatment plants have struggled to stay under the federal maximum for contaminants known as trihalomethanes, which can cause cancer if swallowed over a long period.

Regulations that should have kept drilling wastewater out of the important Delaware River Basin, the water supply for 15 million people in four states, were circumvented for many months.

In 2009 and part of 2010, energy company Cabot Oil & Gas trucked more than 44,000 barrels of well wastewater to a treatment facility in Hatfield Township. Those liquids were then discharged through the town sewage plant into the Neshaminy Creek, which winds through Bucks and Montgomery counties on its way to the Delaware River.

Regulators put a stop to the practice in June, but the more than 300,000 residents of the 17 municipalities that get water from the creek or use it for recreation were never informed that numerous public pronouncements that the watershed was free of gas waste had been wrong.

“This is an outrage,” said Tracy Carluccio, deputy director of the Delaware Riverkeeper Network, an environmental group. “This is indicative of the lack of adequate oversight.”

The situation in Pennsylvania is also being watched carefully by regulators in other states, some of which have begun allowing some river discharges.

New York also sits over the Marcellus Shale, but then-Gov. David Paterson slapped a moratorium on high-volume fracking last month while environmental regulations are drafted.

Industry representatives and the state’s top environmental official insist that the wastewater from fracking has not caused serious harm anywhere in Pennsylvania, in part because it is safely diluted in the state’s big rivers.

But most of the largest drillers say they are taking action and abolishing river discharges anyway.

Cabot, which produced nearly 370,000 barrels of waste in the period examined by The AP, said that since the spring it has been reusing 100 percent of its well water in new drilling operations, rather than trucking it to treatment plants for disposal.

“Cabot wants to ensure that everything we are doing is environmentally sound,” said company spokesman George Stark. “It makes environmental sense and economic sense to do it.”

All 10 of the biggest drillers in the state say they have either eliminated river discharges in the past few months, or reduced them to a small fraction of what they were a year ago. Together, those companies accounted for 80 percent of the wastewater produced in the state.

The biggest driller, Atlas Resources, which produced nearly 2.3 million barrels of wastewater in the review period, said it is now recycling all water produced by its wells in their first 30 days of operation, when the flowback is heaviest. Half of the rest is now sent to treatment plants, but “our ultimate goal is to have zero surface discharge of any of the water,” said Atlas senior vice president Jeff Kupfer.

John Hanger, secretary of Pennsylvania’s Department of Environmental Protection, said he believed that the amount of drilling wastewater being recycled is now about 70 percent — an achievement he credits to tighter state regulation pushing the industry to change its ways.

“The new rules, so far, appear to be working,” he said. “If our rules were not changed … we would have all of it being dumped in the environment, because it is the lowest cost option,” Hanger said.

As for the unauthorized discharges into Neshaminy Creek, Cabot spokesman Stark said the company was aware that its waste shouldn’t have been going to facilities in the Delaware Basin. He said he wasn’t sure, however, whether Cabot knew where the firm it had hired to treat the waste, PSC Environmental Services, was discharging the fluids.

Regulators did not impose any fines after Cabot and the two treatment plants halted the discharges.

Clifford David, president of the Heritage Conservancy, a nature and land preservation group in Bucks County, said he was wasn’t aware that gas drilling wastes had been discharged in the creek.

He said he doesn’t believe any wastewater discharges should be allowed without a thorough treatment that removes all contaminants that could degrade a waterway.

“It seems to me that we have the technology and the capacity to take that water and clean it to a level where it’s a higher water quality than what’s in the river to begin with,” he said.