Seeking Alpha
Profile| Send Message|
( followers)

That sound you hear is the stampede of shale gas drillers away from dry gas plays. The irrational exuberance of shale gas drillers, chief amongst them Chesapeake's voluble Aubrey McLendon, is leading to an impressive destruction of capital. The long run marginal cost is significantly above the current spot price. With natural gas storage bursting at the seams, natural gas is reverting to its historical nuisance byproduct as drilling moves to liquid rich plays. While not sustainable in the long term, the present pricing situation presents opportunities to displace coal generation and some oil in the transport sector.

Both the gas/coal and oil/gas ratios are at record levels:

oil gas coal gas ratio
(Click to enlarge)

Sources: Natural Gas ; Oil ; Coal

Natural gas is now cheaper than coal on a per unit energy basis, and a btu of natural gas also yields more electricity than coal. Only half of coal plants have scrubbers, with older plants now facing the decision of whether to upgrade or to switch to natural gas. Central Appalachian coal at $60/ton is now selling below its mining cost of $65 -$75/ton, which means there is limited scope for coal prices to adjust downwards should fuel switching accelerate.

The oil gas ratio is at record levels also, which has translated to large differentials between CNG and gasoline/diesel (making for compelling payback period calculations):

average retail fuel price
(Click to enlarge)

Source: Alternative Fuels Data Center; Clean Energy Fuels

This presents an opportunity for Clean Energy Fuels (NASDAQ:CLNE) if it can increase the volume of fuel they sell, as their margin per gallon of gasoline equivalent is currently in the range of 35c.

alternative fuel consumption
(Click to enlarge)

Source: Alternative Fuels Data Center; EIA Annual Energy Review 2010

In 2010 2.4% of U.S. primary energy consumption in the transport sector came from natural. With the possibility of a strike on Iran, the oil/gas ratio could go significantly higher, which may result in a knee jerk narrowing of the CLNE oil/gas ratio spread as hands are wrung about $4/gallon gas.

clne oil gas ratio
(Click to enlarge)

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