ft.com > Markets > FTfm >
Why shale gas prices will increaseBy John Dizard
Eli Sunday: If you would just take this lease, Daniel
Plainview: Drainage! Drainage, Eli, you boy. Drained dry. I’m so sorry. Here,saint francois longchamp, if you have a milkshake, and I have a milkshake, and I have a straw. There it is, that’s a straw, you see? You watching? And my straw reaches acrooooss the room, and starts to drink your milkshake ... I ... drink ... your ... milkshake!
[sucking sound]
Plainview: I drink it up!
There Will Be Blood (2007)
...
Daniel Plainview, the fictional early 20th-century oilman, didn’t have the use of today’s horizontal drilling or fracking technology, but he was giving a pretty good lesson about the economics of shale gas. It’s all about drainage – how far can your wells reach,sacs pas cher, and how fast can they suck gas out of the rock.
I agree with the shale gas industry people that they have a lot of real prospects to develop. I don’t think most of their gas can be profitably produced at today’s North American gas price. At about $3.50 per thousand BTUs, substantially lower than the UK price, or about a quarter of the price to be had in the Asian liquefied natural gas market. So the gas companies are drinking investors’ milkshakes, as Plainview might put it. And the Securities and Exchange Commission and New York attorney-general are asking questions about their public statements.
Both the shale gas optimists and sceptics agree the sub-industry’s boom is responsible for the depressed price level. We have now reached the point where most of the media and financial world would have you believe we have entered a new golden age of effectively limitless cheap clean energy. Not to mention a golden age of M&A fees.
The low gas price is also at the centre of the most serious US political fight of the next two months. That’s not the Republican television debates, or the Occupy Wall Street theatre, but the push to limit the Environmental Protection Agency’s authority to regulate coal-fired power plants.
The decisive coal-power vs EPA/gas power moment will come in the congressional debate on “continuing resolutions” to fund the government in the absence of an agreed budget. The House will almost certainly seek to limit or postpone EPA rules; the vote in the Senate will be close, with several coal state Democrats joining pro-industry Republicans.
The coal mining and generation companies’ most powerful argument is that the EPA’s proposed rules will dramatically raise electricity costs, and reduce competitiveness. However, the EPA, the enviros, and the gas-fired power industry point to the forward gas price curve, which now show a low cash cost of shutting down historically cheap coal-fired power.
The EPA and enviros’ fundamental case is that coal plant emissions controls or shutdowns should be effected for the health benefits of cleaner air, and to reduce greenhouse gas emissions. Still, there is no doubt that it would be harder for the EPA to win the struggle with the coal industry if the gas price were higher.
The EPA and the enviros have made clear they do not intend to let the politicos get away with any delays. I think their strategy makes sense, if you believe, as I do, that the cheap shale gas story is running out of time.
Why should this be the case now, when shale gas production is still rising?
Because the shale gas industry, overall, is not generating enough operating cash flow to cover its necessary capital expenditures. That hasn’t stopped the industry’s development programmes, because for the past several years it has been able to cover the difference with borrowing, equity raises, and cash contributions from joint venture partners. This year, though, outside financing for shale gas exploration and production has begun to decline.
Bob Brackett, an analyst with Bernstein Research, says: “This year the North American exploration and production companies are on pace to raise $8bn from the capital markets. This compares with $27bn in 2009 and $21bn in 2010.” Furthermore, both the E&P companies, and their outside financiers, much prefer to direct their development money to rock that is rich in oil or natural gas liquids, rather than the dry gas used for power plants, stoves, and industrial processes.
Recent large takeovers of shale-asset oriented companies, such as Petrohawk Energy and Brigham Exploration, were not, arguably, signs of strength for the industry. Petrohawk’s capex had been running over three times its operating cash flow; Brigham’s about twice cash flow. The break-even gas price for many shale gas deposits would seem to be above $6 per mmbtu, higher than the futures market is offering for the next several years. So the companies needed rich parents.
Industry insiders are calling much of the dry-gas shale development “involuntary drilling”, done to cover obligations to JV partners and counterparties for forward gas sales. Without capital markets money,sac longchamp solde, that drilling and well completion begins to trail off next year. Then the gas price has to rise if production is to keep up with the increased demand generated by coal plant shutdowns.
