experienced

Time to Bail on Shale?

The decision by Chesapeake not to hedge for the moment appears to be based on common sense (at least from the statements in the recent conference call). You don't hedge when natural gas prices are abnormally low. Instead, you are probably better off waiting for at least some strength in spot or futures prices.

There has also been some comment on the environmental impacts from the method used to extract natural gas from shale. Chesapeake already decided not to develop potential natural gas resources in areas of New York state that supply water to New York City. Potential adverse impacts may also restrict development of shale reserves in other areas.

Finally, the historic relationship between the price of natural gas and crude oil, based mainly on the amount of energy from each source, is out of line, with natural gas currently well below crude oil. All these factors justify a decision to postpone hedging until there is evidence of stronger future prices.

Shale Gas: Promises, Promises, Promises

Berman's report has many inconsistencies. If reserves are less than expected, and if cost of extraction is greater than expected, then the price of natural gas will rise to a point where extraction is profitable. In the current climate, natural gas prices are well below their traditional value in relation to crude prices, owing to the notion that we have huge, untapped natural gas reserves.

The large amounts of water/liquid needed to extract gas from shale may lead to environmental constraints, less gas produced, and higher gas prices. On the other hand, if environmental damage is minimal and huge reserves are available, then it's likely there will be new applications for natural gas, such as widespread use in fleet vehicles. In any event, except possibly the implementation of energy conservation measures far greater than at present, the long term price of natural gas will rise.

Climate Change: How to Invest for the Possibility

To argue that the earth has been cooling over the last 500 million years or so is irrelevant. What counts more is the trend over the last 15,000 years (warming), and whether that trend is "natural," as the climate warming skeptics would have us believe, or manmade.

There is no longer any scientific basis to argue that recent warming trends have no relationship to increased burning of carbon, particularly from coal and oil. Meanwhile, those who spend a lot of time trying to minimize the problem are the last to advocate doing anything. Better conservation practices, particularly in home insulation and design of communities to minimize the use of cars to get around would do more in the next 10 years to reduce CO2 than any other policy. The coal burning advocates should get their act together and promote conservation instead of trying to argue that nothing should be done to interfere with smoky coal plants.

Plenty of Natural Gas: Exploration and Production Companies Keep Increasing Oversupply

Regarding the Pickens plan for using NG for transportation, it is a mystery to me why more public officials haven't endorsed the idea. Perhaps the lobbying for continued use of gasoline and diesel has discouraged attempts to use NG. While it might be difficult to convert general use cars and trucks to NG, it certainly would be practical for school buses, local truck and taxi fleets, and other primarily local applications.

The fundamentals for oil have not changed: The rate of growth in demand, spurred by huge increases in transportation demand in China and other developing nations, is greater than the rate of growth in proven reserves. Put another way, less new oil is being discovered than is being consumed. This means the price trend for crude is up. Meanwhile, the low prices for NG, if nothing else, should provide incentives to switch to NG where NG is a viable alternative. All this ignores pollution related issues, which should provide further incentives for NG.


On Sep 11 10:31 AM Skip Olinger wrote:

> Well done article but I have a question for you and the 2 previous
> commenters.
>
> As I understand it, NG demand has fallen significantly primarily
> due to a drop in industrial demand and utility demand. Supply has
> increased as new unconventional plays have gone into production.
> So producers, who cannot just shut off wells like a light switch,
> have started to store gas in hopes of higher prices down the road.
> Storage is becoming full. Once full wells may be forced to shut down.
> Pressure in the system will fall so even pipelines won't be making
> revenue as no gas will be moving. Voila, end of the world. Do I have
> this correct?
>
> But wait, if you want to sell your gas at say $4.50 rather than $2.73
> all you would have to do is sell a futures contract for Dec delivery.
> That is 3.5 months away! There must be plenty of producers that have
> sold their production forward for winter delivery and intend of delivering.
> And, if you want $5 all you have to do is sell for June '10. What
> am I missing here?? I would appreciate some help.
>
> Also, the economy seems to be turning around a bit. That should start
> to increase industrial and utility demand. How do you see that playing
> out??
>
> Lastly, how do you see the Pickens theory play out with conversion
> to NG use away from Petroleum. I suspect that is a ways off but some
> government car fleets are now being converted?
>
> Thanks to all for your help

Is There Enough Natural Gas?

The numbers you provided concerning consumption of natural gas for transportation use and adequacy of reserves are reasonable, but that's not the whole story.

Because there are a limited number of natural gas outlets for CPN vehicles, one would first want to look at practical applications, such as fleet use in a local area. Certainly under that limited alternative, the supply of natural gas would be more than adequate, and the cost, even if natural gas prices rise to twice their current level, would still be less than gasoline or diesel fuel.

As to continued use of coal, there is at least one process (developed by SASOL) that converts coal to gas at sufficiently low prices to make such an alternative worthwhile. Sasol has several CTG plants outside the U.S. Whether these plants are low enough in CO2 emissions to please everyone is a question I can't answer, but CTG gets rid of most of the pollution problems associated with coal.

One would think that with all this stimulus money being thrown at infrastructure projects, a compressed natural gas infrastructure could reasonably be added to the list of cost effective projects. I make these comments on the basis of my past research in energy alternatives and my current position as director of the oldest online investment advisory service.

Natural Gas: Clean Fuel with a Dirty Little Secret

It's unfortunate that those who talk about an imbalance in supply over demand fail to add the important qualifier, "at a given price." As natural gas prices fall, not all known reserves can be recovered profitably. Those who believe the U.S. has "massive" supplies fail to take into account the price factor. At $13/mmbtu, well, yes, the supplies would be massive. At $7, any glut would disappear shortly, especially as the winter heating season approaches. Given the energy relationship between natural gas and crude oil, Pickens plan makes sense to convert to the use of natural gas as an automotive fuel (initially it would be limited to fleet vehicles or vehicles that are driven only in a local area). But this limited additional use (think about mail and parcel delivery as an example) would make a huge difference in natural gas demand at current price levels and would probably be a much better solution than adding subsidized ethanol to gasoline.

Investors appear to be pricing stocks like CHK on the notion that there is too much supply (at current prices) in relation to demand. But CHK engages in very skillful hedging operations (most of the time, but not in the last quarter) that usuallly enhance earnings. In the last quarter, when gas prices rose well above their expectations, the hedging worked against CHK. Predicting future CHK earnings depends not only on the hedging operations but on the price of natural gasl.