carbonates

Natural Gas from Shale: Emerging Plays

I think your article sums up the potential fairly well. I see shale gas as a game changer that changes several things. It has already had an effect on world gas prices for NGL, because the US import market is failing to materialize. Europe and Japan are indirectly reaping the benefits of US shale gas in the form of lower prices for imports. At some point many shale gas plays will become NGL sources, and I think this is already being planned in the Canadian plays. Shale gas is likely to change markets for gas on most continents, and has potential to create industrialism in currently underdeveloped countries that have limited know resources at present. Because natural gas requires pipeline infrastructure, many companies are currently pipeline prospecting, to find gas in places where it can be marketed easily. That's one reason I don't think the Alaska gas pipeline is going to get built anytime soon.

There are risks, and many companies in the gas shale market are probably doomed to failure in the present market. That does not mean there will not be winners, but not everyone in the game will win. Drilling costs and initial investments in gas shale plays can be huge. Compared to conventional drilling where a well might drain a square mile of land (~260 hectares), many gas shale wells only drain 80 acres (~32 hectares). If short-term gas prices are high enough they can recover drilling costs in a year or two, but the capital to drill enough wells to ramp up production is significantly higher than the cost of a big-hit conventional gas well. Anachronistic leasing practices and bad regulatory policies abound in the gas shale plays that create another problem. Issues with public policy (NIMBYism), reliable sources of water for fracturing, and possible regulatory restrictions coming from the anti-carbon movement are other issues.

By the way, the Middle East is not without its own potential shale gas and the Saudis are already at work.

Overall, I totally agree that gas shale is already a game-changer, but its going to be a wild ride, and without major changes in consumption (demand) patterns natural gas is doomed to be highly cyclical as gas shale players react and over-react to market prices and other forces that keep them drilling even when the economics of individual wells don't make sense. There will be losers, and a few big winners from an investors standpoint.

As Natural Gas Prices Decline, Natural Gas Stocks Rise

I still think it will take a cold winter to bring gas prices back up, or an especially active hurricane season.

I see no real progress in Washington towards encouraging natural gas use. Most of the actions taken in Washington so far this year will hurt both domestic natural gas producers and domestic oil producers, and give Canada and other sources of imports an economic advantage.

The one thing that is still a wild card in all of this is that pesky decline curve on shale gas wells. While shale gas added tremendously to production last year, most of those wells have anywhere from 60-80% annual declines. It takes continuous drilling to keep most gas shale plays producing steadily. The gas shale effect could go away by the end of this year.

I'm holding the natural gas stocks I have (I have a large position in coal bed methane), but not buying more for now. I think we will see more declines before we see the next bull market for gas. In fact, I think we are going to see a serious shake-out with a few natural gas producers going broke this year as they watch their leases expire undrllled, or desperately try to drill to hold the leases at a loss.