The “Bridge to Nowhere” in the Shale Gas Industry

by S. Tom Bond on February 12, 2013

The “Bridge to Nowhere” & Pressures on the Shale Gas Industry

Commentary by S. Tom Bond, Resident Farmer in Lewis County, WV

In the world of shale gas advertising “Natural gas is the bridge to the future” seems to be drifting off into a well-deserved oblivion. The phrase first appeared a few years ago along with the notion that shale gas would give the nation military security and that shale drilling was simply a continuation of older drilling technology.

A new era has arrived. The companies have “leased like crazy,” sopped up a generous portion of the loose change floating around the investment sphere and by now have painted themselves into a corner. That corner is oversupply, and consequent a low price for their product. The investment blast has been an unmitigated success for the firms who find investors and provide funds, and for a few top people in the drilling corporations.

Both groups “take theirs off the top,” before passing the rest to the people who do the planning. The bankers and the Aubrey McClendons can retire at any time. The next-level executives must clean up the messes. They are the ones who must work out how to hold things together in the price squeeze.

The Energy Information Administration is predicting usage (consumption) of 69.84 billion cubic feet per day in 2013 and 69.54 in 2014, compared with the 69.19 actual use in 2012. Predicted use is “steady as you go,” as they say in the navy. “Through 2014, EIA expects prices will gradually rise but still remain relatively low.” the report says. The graph “U. S. Natural Gas Prices” both residential and “Henry Hub” (industry standard) prices show virtually no change from year to year to January 2015.

At least one corporation has a forward contract or a future contract to “lock in” a future price. These are arrangements to deliver a certain amount of gas to someone else at a given price at some future time. The locked in price is above operating cost so the company can go ahead and produce with a minimum profit. If gas is above the guaranteed price at the time of delivery, the driller doesn’t get the premium, it goes to the gambling investor. If it is below at the time of delivery, the gambling investor has to make up the difference. In either case the drilling company goes ahead drilling.

This gives that driller a “leg up” on the rest of the industry as far as survival is concerned, but at the expense of the other drilling firms, because only so much gas can be sold. Another way some companies are getting around low price is previously signed long term agreements with a distributing company to accept the gas at a price set when it was higher. This allows them to drill, but again doesn’t help the industry, since only so much gas will be sold. This arrangement does hurt the consumer, since he/she must pay the distributor a higher price than if the distributer paid day-to-day prices.

All those wells drilled and capped-in without production and all the wells that are being drilled now will help to keep the price of gas low in the immediate future, because there will continue to be an oversupply, certainly for a few years. So there is a whole lot of scrambling going on in the drilling industry, but still expansion. The gas is being flared in the Bakken and right after drilling elsewhere to get the natural gas liquids. Gas is not valuable enough to merit conservation.

A few more observations. One way to increase sales is exporting liquid natural gas (LNG) overseas. This is only viable in markets with a price significantly above the U. S. price. Huge capital requirements, to liquefy, transport and re-gasify, mitigate against the project. Another way to sell more gas is to increase use at home. Several possibilities present themselves. Using methane for certain kinds of steel production and the manufacture of nitrogen fertilizer, both of which have been largely moved offshore, have been suggested and at least one steel company is making plans to return in Louisiana. Also, there is a lot of talk about converting diesel and gasoline vehicles to use natural gas. All of this is very capital intensive, too.

Even gas liquids seem to be in over supply. But there is much talk of building “cracker plants” to turn ethane in to ethylene, a principal starting material for plastics, and then the plastics plants would have to be built, and that is another capital intensive move! And the economy is down, not only in the U. S. but all over the world, so who will provide the extra demand for the new plastics products?

The national defense argument which was so important in the leasing era is shot down by the rush to export. The idea that shale drilling uses an extension of older technology with little change is fading fast. Figures about volumes of chemicals along with their toxicity, and pictures of the surface changes are changing that. Even the often recited global warming advantage they claim for gas is in doubt. Utilities are slow to adopt gas for new electrical generating plants, because knowledgeable people know the reserves may not hold out to keep gas cheap for 50 to 60 years, the period new power plants are expected to last.

Jobs have always been a principal argument, but shale gas extraction is surely not a game changer in the areas where it occurs nor for the nation. A few local businessmen benefit and a few truck drivers and a few office people. A lot of other people deserve jobs, too. Thin as it is, the economic argument is all the industry has now. To survive, the industry must get past the next few years to get better prices, then reserves must hold up after they have emptied the “sweet spots,” the high production areas which are always taken out first. If natural gas is a bridge to the future, some other energy source had better come along soon.

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