An Energy Board Game To Explain The Future Of Natural Gas

Includes: LNG, UNG
by: Matt Smith

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It was once again my pleasure to bemuse, amuse, and educate an audience at an American Metals Market Conference - this time in Houston - for their Steel & Pipeline Conference this week. After unleashing the Crude oil 8-ball at the last AMM conference, I felt I had to raise the bar this time, so I invented ... the ultimate energy board game.

The board game invented is called 'Fact! Fact! False!', and the aim of the game is to get around the board by identifying which energy trends are true for natural gas, and which are false. Here are three of the trends from the game that I spoke about:

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FACT! The cost to produce natural gas at the Bakken shale = $0.00

For those looking to understand why natural gas prices are so low, this chart from Bentek provides a simple yet compelling explanation. While the break-even costs for producing natural gas from conventional plays has fallen to around $5, the costs involved in unconventional plays such as shale are much lower.

However, as attention (and hence, drilling) shifts from paltry-priced natural gas to vastly more profitable liquid-rich shale plays, areas such as the Bakken shale in North Dakota focus solely on crude oil and other liquids such as NGLs ( = Natural Gas Liquids = propane, butane, ethane, et al).

Here's the kicker; although the focus of these liquid-rich plays is oil, they still produce natural gas. And because this gas is essentially an incidental by-product (called associated gas), it is produced at no cost. Yep - it is basically free. So as oil shale plays ramp up to take profits on high-priced oil, increasing volumes of natural gas are coming to the market at no cost to produce. Hence, natural gas prices at decade lows and production at record highs.

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FACT! LNG exports are going to vastly change market dynamics...but not necessarily price

Swiftly following fracking up the flagpole of fervor and interest in Natgasworld™ is the prospect of LNG exports later this decade. With the approval from the DOE for the Sabine Pass site to become an export terminal - the first to receive this accolade - the owner, Cheniere Energy (NYSEMKT:LNG), is entering into long-term agreements to sell LNG exports starting in 2017. The concern now is that if all of the sites going through the (laborious) approval process were approved, it would open up over 15% of US supply to be exported each day.

The reality, however, is that this will not happen, given that a recent EIA (= DOE) report stated 'increased natural gas exports lead to increased natural gas prices' (not the most earth-shattering revelation). The more likely scenario is that some sites will receive approval while others will not, given the guidance from the US Energy Secretary Steven Chu last week that 'the low price of natural gas is hurting domestic job growth, and that exporting a small amount of the fuel would boost the economy'. Everything in moderation, as Oscar Wilde said.

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Is legislation set to derail this runaway train that is shale? FALSE!

Despite the current backlash against hydraulic fracturing (fracking), it would be FALSE to believe that legislation could halt the shale revolution. Although the EPA is undertaking a study of hydraulic fracturing and its potential impact on drinking water resources, the initial findings of this are not set to be released until the end of this year, while the final report is not due before 2014 - time for momentum to continue to build. In the meantime, this report by the DOE last August has already attempted to assuage concerns.

Also, given the recent State of the Union speech by President Obama, it seems the development of shale plays and natural gas in general is a key element of the administration's energy policy. His attempt to allay fears about fracking through tighter regulation will mean full disclosure of chemicals used; this only serves to highlight the government's willingness to remove potential barriers to development.

So there are just three examples from the both entertaining and educational board game called 'Fact! Fact! False!' If you wish to purchase the board game, it is available for $19.99 (plus shipping), checks made payable to Energy Burrito. Thanks for playing!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.