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Jim Letourneau's Blog

Investing, Technology, Travel, Geology, Music, Golf. I think that covers it.

Natural Gas Doubters

The New York Times is one of the few newspapers out there with the resources to actually report on news. That does not mean that it lacks an agenda. The paper has a well documented liberal bias. From my browsing of their natural gas related articles, I'm pretty sure they are not in love with the stuff. Prefacing hydraulic fracturing, a procedure used in oil and gas wells for the last 60 years, with the term "controversial" has created an atmosphere of fear around the process. Toxic chemicals! Earthquakes! Fire!

The continued attack on shale gas has now shifted from environmental concerns to economic ones. Two recent New York Times articles Insiders Sound an Alarm Amid a Natural Gas Rush and Behind Veneer, Doubt on Future of Natural Gas are quoting industry "insiders" who have negative opinions on the economic viability of shale gas (source material). While they may be "insiders" most of the quotes come from shale gas "outsiders" with little or no investment of money or creativity in actually making these plays work. These bean counters aren't making a bit of difference to energy supply. Many of them use the term "Ponzi scheme" or "bubble" which is confusing to me because there certainly isn't a price bubble. I don't see one in share prices either. Since when was tying up large reserves of a commodity when prices are low a scam?  Natural gas prices could rise 50% and still be comparable to prices back in 2004.



Natural gas producers went through 2005-2009 with a price that rarely dropped below $6 but since 2009 it has been mired in the $3-6 range.



US natural gas production has increased 6 years running in spite of lower natural gas prices. I'm not sure how increased natural gas supply in a lower price environment is a problem. There are all kinds of things to consider when evaluating natural gas supply scenarios but the bottom line is there has been large upward shift in supply at current prices. If producers are lying about their costs in order to raise capital, the market will eventually find them out. Some shale plays may not perform as well as expected, others may do better. I suspect a few more years of operator experience will allow for better results (it is very early days for shale plays) and more confidence. In the interim natural gas prices may have to rise. If they do, I suspect natural gas supply will quickly increase.

Given that natural gas has the potential to dramatically alter North American energy supply options, my question to the doubters comes courtesy of The Stork (his only line in Animal House - click here). I'd rather hear about solutions. The bean counters quoted by the New York Times don't have any.