No Moss

The Realities of Natural Gas

I am no expert at all, but if I can synopsize his post, it's that we have a limited supply of gas in the long run, although in the short run we seem to have plenty. Gas is still relatively cheap when you measure it in terms of barrels of oil equivalents (comparing the energy produced from each). The problem is that as gas increases in price, demand for it will decrease. Gas prices in both the US and in the world aren't rational, since gas supplies are local and it's difficult to deliver gas from the wellhead to the user. This is true for both internal (US/Canadian) sources, where, as with coal, most production occurs outside of the Northeast, and for external sources, i.e., LNG delivered from places where gas occurs in lavish abundance. Expensive pipelines have to be built to deliver the gas to either gas companies or electric companies, and in the case of LNG, expensive specialized port facilities have to be built.

He believes that the free market is not a good way develop the gas infrastructure (good point!) since, as stated above, gas use will tend to decrease with price. This means that expensive buildout of infrastructure may not ever have a sufficient return on capital to justify the cost, and even if it does, the total cost of the infrastructure might be more expensive than would have been necessary if it could have been rationalized by central planning and financed with investments made more secure by long-term contracts.

I wonder if he's taking into account large recent discoveries of natural gas in the "shale" areas, such as Haynesville.

Gas producers (CHK is an exmple) will benefit from the current price of $10 per MMBTU plus any increase in that price. Prices have been as low as $5.50 in the last year (August, 2007). They are also benefiting from huge recent finds.

The gathering and distribution pipelines are mostly MLPs, or master limited partnerships. Some have commodity price exposure (they make more money when prices are high), and some don't. Some are gatherers and processors, which cluster around a producing area. Others are short or long-range pipelines, which collect fees for the use of their pipelines. Further, some are involved in both gas and oil.

Most of them rely on 50% debt and 50% equity to fund new projects, since they don't accrue earnings because of their structure as partnerships. I don't know the spectrum of MLPs well enough to know which ones are which in the above-mentioned areas, although I do know more about my three holdings in domestic MLPs. I also don't know how to measure the feasability or risk of new projects, but I know something more after reading Professor Kirk's contribution.

I'd welcome any ideas about how to measure the value of producers and MLPs.