While Natural Gas Production Increases, Company Stock Prices May Not

by: David Enke August 12, 2008 | about stocks: CHK / EOG / XTO    

David Enke

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As a result of high prices, new reserve finds, and better technology, natural gas production in the US is up 8% this year, with growth expected to continue as new wells come on-line in Texas, Oklahoma, and Louisiana, and new reserves are scheduled to be taped in Appalachia and Canada (see WSJ article).

Unfortunately for the natural gas companies, demand is not growing as fast, up only 5.5% - the Pickens Plan notwithstanding. US LGN imports have already been down given the higher prices paid in Asia and Europe which have caused shipments to be diverted (see previous post). As long as production in the US stays high, with reduced avenues for exports and steady demand at home, prices will be pressured to fall. Then again, we may be getting near a tipping point as prices approach $8 per million BTU, a point that analysts believe producers will cut production, with the tighter supply driving prices back up in a form of a self-correcting mechanism.

Even with short-term corrections, longer-term price pressure will most likely come from new discoveries of shale, the dense rock formations that have been known to hold natural gas, but for which production had been impractical due to the rock not being porous enough for gas flow. However, technology came to the rescue in the form of using pressurized water to crack the shale and release the gas. The technique is working in the Barnett Shale in Texas and can be used in the Haynesville Shale in Louisiana and Texas, as well as the Marcellus Shale in Appalachia.

Altogether, US shale could hold as much as 840 trillion cubic feet of natural gas. Astonishingly, this estimate is equivalent to 140 billion barrels of oil, or more than half the proven reserves of Saudi Arabia. While none of this natural gas will be coming on-line overnight, it certainly seems promising for helping supply some of the clean energy needs of the US going forward.

Unfortunately, unless the natural gas companies, T. Boone Pickens, and others can convince Congress of this benefit, it may be a while before demand catches up to production. As a result, Chesapeake Energy (CHK), XTO Energy (XTO), and EOG Resouces (EOG) may have to wait for real price appreciation, or to see the benefits of the massive investments each has been making to tap into the shale reserves.

Disclosure: None

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This article has 18 comments:

  •  
    Aug 12 05:23 AM
    "it certainly seems promising for helping supply some of the clean energy needs of the US going forward"

    Pleased to see that you didn't say 'green' or 'renewable' though 'clean' is a bit of a stretch. Perhaps 'cleaner burning' is more appropriate.

    CrossProfit
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  •  
    Aug 12 08:30 AM
    "While none of this gas will be coming on-line overnight"?
    There are 19 shale basins in the US being actively drilled right now. In its recent white paper on US Shale Gas, Halliburton estimated the recoverable reserves at 500-1000 TCF.
    The play that broke open this resource was the Barnett Shale under Dallas/Fort Worth. Its easterly extension into Alabama - the Fayetteville Shale - came next. Now we're seeing the same technologies applied shale all over USA ... Bossier-Haynesville, Marcellus, Woodford, Lewis, Antrim, New Albany, etc.etc.
    The largest gas companies in USA - alongside a slew of fast-growing independents - are heavily focused on drilling and producing these resources ... and there's plenty of gas already in the pipeline that originates from them: about 4.5% of US nat gas supply comes from the Barnett Shale!
    Reply | Link to Comment
  •  
    Aug 12 08:56 AM
    MattB: assume you typo'd "Alabama"...... Shale is in Arkansas!

    The problem with all of the basins you list is offtake; there isn't enough pipeline capacity to take huge amounts of gas "overnight". So, there are several projects getting kicked off to expand the capacity but these will take a couple of years. Hence, the "not overnight" comment.

    And I'm guessing our crooks, errrr politicians, (apologies to the crooks for the disparaging comparison) will get their panties in a wad when companies start shutting in gas. But, a lot of this gas is not economical below $7-8 so yes, the pace of drilling will be reduced if prices drop into that range.

    One thing to add to the author's post: The expectations of "The Street" for the pace of development in the Marcellus is significantly 'hyped'; no way does the drilling ramp up as fast as everyone is expecting. Permitting, water supply issues, water disposal issues, NIMBY issues, will all conspire to slow things down considerably. Take whatever forecast you hear for drilling over the next 3 years and assume that number of wells will be drilled over the next 5-7 years. But that's good; it will provide a floor for the price. Sorry consumers. Your price to heat the house and keep the lights on will be going up and staying up.

    And, LNG will continue to lag in the U.S.; why ship it to the US for $8/mmBTU when you can send it to China/Japan for $15??
    Reply | Link to Comment
  •  
    Aug 12 08:57 AM
    Previous post...first sentnece should be Fayetteville Shale is in Arkansas, not Alabama.
    Reply | Link to Comment
  •  
    Aug 12 09:03 AM
    T. Boone is right! When the richest oilman in the world puts his money elsewhere, one should pay attention. No chance we can increase domestic oil production as fast as NG no matter where we drill. Coming up with 14+ million barrels/day more in North America is a pipe dream.

    NG is the fuel of the future for personal transportation, unless we are willing to go electric for commutes, and use mass transit for trips greater than 60 miles. Burns cleaner, lower maintenance costs for vehicles, plus we have the reserves, not our enemies. Having the infrastructure in place for NG will make it easier for the next fuel, methane.

    Wake up America, get off the oil and get on the gas!
    Reply | Link to Comment
  •  
    Aug 12 09:05 AM
    Here are a few caviets to this excellent 'shale' story. Shale is not really a new territory, and many companies have been engaged in exploration/production from shale for more than a decade or two. It has recently become more attractive because alternative new NG supplies/discoveries involve high costs due to more difficult and deep terraine, especially in the Gulf of Mexico. So, it is always going to be a "competition"... between the two alternatives as the older supplies from easier terrains are depleted. Shale exploration and devleopment for gas production involve high capital investments, production expenses, and relatively specialized manpower experienced resources which are not availablein great abundance. Lower prices for NG derived from shale will have a some floor which will be influenced by alternatives as well as the depletion rate ofNG from the old wells. Barring a serious slowdown in the economy, the depressed NG prices prevalent now may just be a six month or a year's episode. Perhaps, also Alaska may just become less and less attractive and iffy, due to pipeline costs and uncertaintieson the feasibility of financing the proposed pieplines contemplated.
    Reply | Link to Comment
  •  
    Aug 12 09:18 AM
    Brahm: excellent post. I'd add one item to the success of shale today : the technology required and the application thereof. the application is kind of related to the specialized manpower/experienced resources. These folks are being paid huge sums to leave one comapny and go to work for their competitors.

    Alaska Gas: won't see the U.S. lower 48 for at least 8 years...maybe longer. There's a lot of demand to be filled in the meantime.

    Reply | Link to Comment
  •  
    Aug 12 09:39 AM
    Sorry ... wishful thinking that Fayetteville extends into AL!
    :-)
    Reply | Link to Comment
  •  
    Aug 12 09:40 AM
    I have a question I have never seen the answer to:

    If NG producers in the US don't like domestic NG prices, why are THEY not shipping LNG at $15/MCF to Europe or elsewhere--ie, use the LNG terminals and the pipelines to them IN REVERSE?

    Jack
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  •  
    Aug 12 10:32 AM
    Jack: I think we lack storage, facilities to liquify, and ships to carry. This would have to be built out and I don't know what price justifies its build. I am thinking along your same lines however.
    Reply | Link to Comment
  •  
    Aug 12 11:27 AM
    one little problem i see is the need to use high pressure water to break up the shale .......how much water is needed ???? we don't have a huge supply of that either ???? will we reap huge supplies of gas only to see our lakes go down 20 feet ?????? There's always a catch !!!!!!! Solve one problem , and damned if ya don't create another one in the process !!!!
    Reply | Link to Comment
  •  
    Aug 12 12:06 PM
    LNG: another poster answered this for the most part. The cost to build a gasification facility and the ships is outrageous. Plus you need to get an export license from the US government. Not too easy in that we were just saying we were close to a shortage (a few years ago). Plus you have to find a community that would let you build it...not too easy as we are a country run by greenie weenies who whine about everything. And, we have been building several LNG IMPORT facilities to bring LNG into the country, not export it!!!!

    Water: yes, it takes a lot of water to frac a well to get it to produce. However, that water eventually ends up back in the water system. Contorted path, maybe, but it doesn't get destroyed! But YES, water is a big big issue in many areas. 2 years ago a drought in east texas severely hampered the ability to complete wells in the Barnett Shale area. Plus, the produced water needs to be treated before it gets put back in the supply. All of this adds to the cost of drilling and producing the gas. Another reason why if prices drop too low, all of this drilling will come to a halt, our gas supply will quickly decline below our demand and prices will go right back up! About a 6 month elasticity period, give or take a couple of months!
    Reply | Link to Comment
  •  
    Aug 12 01:09 PM
    On exporting LNG, licenses, etc...check out CHENIERE ENERGY, INC (LNG) they have all that near the border of Texas & Louisianna. They are having financial problems because LNG is not coming into USA....do not understand why they are not doing the export thing...maybe in the future..I think they are buildinfg a collection pipeline etc.
    Reply | Link to Comment
  •  
    Aug 12 01:26 PM
    Cheniere only owns an IMPORT facility, not an EXPORT facility. The sunk BILLIONS into this facility and no gas is coming to the facility. You cannot just "reverse the process" and turn it into an EXPORT facility. 2 years ago, the big buzz was bringing more LNG into the U.S. So all of the companies went out and spent billions to get the IMPORT facilities built and now we want to EXPORT!! A good lesson on risks and exposure in the oil/gas business.

    Pls be careful with this type of advice. Based on above post if you went out and got some Cheniere you'd probably be watching your money go buh buy! Understand the LNG process. "...they have all that near the border of Texas and Lousisiana...". NO THEY DON'T!!!!!
    Reply | Link to Comment
  •  
    Aug 12 05:02 PM
    back in the eighties i was sent to baltimore to get my my merchant marine engineering license certified for lng tankers at the calhoon school on 9 light srreet. we were guaranteed a job on energy transport lng ships to run between indonesia and japan. i'd like to know if these ships are still around ? if so they could ship lng anywhere in the world. they were under u.s flag then. wallyjm1635@earthlink.... i'm 87now!
    Reply | Link to Comment
  •  
    Aug 12 08:08 PM
    Good discussion. I too have been wondering about our LNG export capability. As mentioned, higher price in other markets is drawing foreign supply away from the US. For example the recently completed west coast facility in Mexico now diverts most of their long term contracted gas for import (presumably at a good low cost basis) to other markets for higher prices. GLNG has been converting former LNG carriers into regasification terminals that can be towed to and moored in a sheltered location to provide a quick solution in place of a permanent shore based facility. I wonder if they could reverse the concept and turn the LNG carrier into a liquefaction facility?
    Reply | Link to Comment
  •  
    Aug 13 05:29 PM
    One way to lower carbon dioxide emissions and clean up our air is to substitute natural gas for coal. Coal has almost twice the carbon emissions for the same amount of electricity produced as natural gas, not even counting the releases of mercury and other toxic byproducts from burning coal. Substituting natural gas for coal would be an intermediate step in reducing carbon emissions and give us time to develop more 'perfect' renewable resources like wind and solar. All the government has to do is prohibit the construction of new coal plants and start restricting emissions from existing plants.
    Reply | Link to Comment
  •  
    Aug 15 04:16 PM
    As a NG investor, the ideal scenario is that enough new gas comes online to keep the price reasonable (avoiding boom/bust cycles, demagogic attacks from the politicians, etc), while the amount that gets into production is modest enough that the price stays stable (including a gradual rise for inflation).

    Unfortunately, commodities prices don't tend to follow such ideal scenarios.
    Reply | Link to Comment
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