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The Price Of Natural Gas From “Zero” to Dirt Cheap
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
On March 14, I shredded the natural gas components of the government’s Blueprint, a document that spelled out its energy policy, because it relied on the existence of dirt-cheap natural gas from the “shale gas revolution.” While the combination of horizontal drilling and hydraulic fracturing (fracking) opened up huge resources in the US, and natural gas (NG) production jumped as a consequence, it also pushed prices far below the cost of production, for far too long. A disaster for an entire industry. An opportunity for its customers. But it cannot last.
Back when the Blueprint was released, NG was truly dirt cheap: $2.28 per million Btu (MMBtu) at the Henry Hub. Storage levels were 48% above the five-year average, after a warm winter had curtailed the use of NG for heating. There was talk that the price would go to zero, as storage levels would reach capacity in the fall, and excess production would have to be flared. Producers cut back on drilling, and by mid-March, Baker Hughes’ rig count had plunged to 670 from 936 in October last year. It was a catastrophic scenario. And the price kept dropping.
It was wreaking havoc in the industry—yet production continued to rise. When NG hit about $1.90 per MMBtu at the Henry Hub on April 19, a decade low, its path to zero seemed assured. Lacking liquefied natural gas export terminals, the US couldn’t even sell its excess production to the energy-starved Japanese who had to pay around $17 per MMBtu on the world markets.
By May, billions in write-offs were pummeling the industry. Chesapeake and other producers were dumping assets to stay afloat. The rig count dropped to 600. Shale gas production was an uneconomic activity at these prices—though by May 23, it had climbed to $2.73 per MMBtu, up 44% from the April low.
The economics of horizontal fracking are horrid. With all wells, production drops over time. But instead of years for traditional wells, decline rates for shale gas wells are measured in months. After a year, production may be down by 80%, after a year and a half by 90%. High production early in the lifecycle allows drillers to show a big upfront profit. Initially, decline rates are obscured by production from new wells. But the more wells they have, the more they have to drill to hide the drop-off in production of older wells! What caught up with them was reality. And they responded by switching to drilling for oil and gaseous liquids, which fetched higher prices, because they had to survive, and producing dry NG wasn’t a survivable activity.
But the benefits of dirt-cheap NG were spreading across the country: households and companies benefited from lower energy bills. Power generators profited from their strategy, launched in the 1990s, of investing in highly efficient natural gas combined-cycle (NGCC) turbines. The building boom of NGCC plants nearly doubled natural gas-fired capacity, at the expense of coal-fired plants—which are being retired at a breath-taking pace [Natural Gas Is Pushing Coal Over The Cliff]. And companies that manufacture plastics, fertilizers, and chemicals from NG are building plants in the US where they can buy their raw material for a fraction of the cost elsewhere in the world.
By June 20, excess inventory levels were plummeting. It had become clear: storage levels would not reach capacity, and NG would not drop to zero. Speculating in NG entered the sweet spot: the price was still way below the cost of production, but the threat of zero had been taken off the table. Timing remained uncertain, but sooner or later the price would have to self-correct, and by nature, it would over-correct. The rig count had fallen to 562—but production was still rising. The price dropped to $2.53 MMBtu at the Henry Hub. Nothing is ever easy. And in the industry, capital destruction continued [Natural Gas: Where Endless Money Went to Die].
So, when will production finally decline? With drilling activities slowing, production should follow, the theory goes. But there’s a laundry list of reason why it hasn’t happened: producers are now only drilling their most productive wells; drilling technologies have become more efficient, such as pad drilling; finished wells that had been shut in due to pipeline constraints or collapsing local prices, including over 1,000 wells in northern Pennsylvania, are coming on line; dry gas production as a byproduct from the booming oil and gaseous liquids plays is surging; etc.
The EIA’s Monthly Supply and Disposition Balance for July, the latest available, shows that production of dry NG through July was still 6% higher than last year! From April through July, production was up 4.2% over prior year. For data since July, we have to look at the EIA’s weekly figures (available only in percentages), and they’re tapering off: the last week that production was over 3% higher than the same week in 2011 was the week of August 15, at 3.4%. Since then, the differential hovered been between 1% and 2%. Last week, it dropped to 0.6%. So production is still higher than it was at the same time last year (but barely), even as the rig count dropped to 427. Waiting for production to decline is like waiting for Godot.
But demand for dry gas is ballooning. From April through July, which excluded the effects of the warm winter, demand was up a stunning 9.6%. The EIA’s weekly year-over-year demand numbers are volatile, but since late August, the low point was the week of September 12 with a 6.2% increase in total demand over the same week last year; four weeks in that period saw double-digit increases, with the week of October 3 jumping by 18.7%.
This surge in demand has performed what in March would have been considered a miracle: it cut the amount of NG in storage from 48% above the five-year average to 7.1%. Inventory levels now feather the upper limit of the five-year range.
At its current price—recently $3.43 per MMBtu, up 80% from the April low—NG is still dirt cheap, and therefore, demand from power generators and industrial users will continue to be strong. When the heating season kicks off in earnest, weather will be the primary factor for a few months, and cold waves, or the lack thereof, might distract from the surging demand for power generation and industrial use that will gradually put pressure on storage levels even if production refuses to decline.
The protests and attacks against American embassies have devastated public support for a military presence in the Middle East, writes Chriss Street. And to facilitate a Middle East withdrawal, the public will soon demand a crash program to exploit domestic energy resources. With big opportunities. Read.... The Coming American Energy Independence.
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I agree that clinton shouldnt get big credit for supposed surplus, they were still in deficit and borrowing from Soc Sec trust fund, the only govt program being taxed and paid for in advance was paying for all the other programs put on credit card rather than being taxed for.
However, even that non-surplus, mild deficit, was quickly wiped by W. He did a major tax cut and kept it going even when we ran into two wars and domestic and global war on terror, definitely costly. He also did pills for senior is a very expensive way without taxing for or just choosing not to do, and that greatly contributed to deficit. Economy in early 2000s not as good as late 90s but still not so bad, so that was smaller reason for deficit.
So Clinton hardly created a surplus, but W certainly made deficit much worse. Just as we tax people to pay for Soc Sec, we could have taxed people to pay for wars, or at least rescinded tax cuts of 2000, but we didnt, we went to the credit card and even added huge spending increase of Medicare Part D
There was a deficit under Bush. He also inherited the collapse of a market bubble with decline in economic activety. Further, soon after being in office, we had the challenge of the September 11 attacks. The response brought on more economic weakness and an increase in military spending. However, with the initial tax cuts and some economic recovery, the deficit steadily declined, UNTIL Obama.
Bush was an economic disappointment particularly as he expanded the Medicare entitlement.
Bull shit on the deficits....
W left O a doozy in the last FY attributable to W....
SP500 impending sell off...
Despite recurring short squeezes, SPX etc daily charts continue to break down.
DOW 8 hour chart shows H+S (bearish pattern)
http://trader618.com
http://www.zerohedge.com/news/2012-12-24/market-analysis
The song remains the same, if the return on capital and resources is not greater than the original investment, the technology gets expensive and dies. What is not being discussed is the issue of rapid and exponential loss of productivity for natural gas wells. Oil fields can take decades to sour, not the case for the majority of gas wells that can become unproductive in a couple years. The good news is all of the infastructure can be used for other renewable gases like methane which can be produced from numerous renweable feedstocks.
The NG drillers are hemorrhaging cash, 20 billion p.a.....
Are we still posting the model from Seeking Alpha about decline rates? Somehow rig counts have dropped yet production has not. What could be happening??
You didn't read the article, either, did you? From the article above:
"The rig count had fallen to 562—but production was still rising. The price dropped to $2.53 MMBtu at the Henry Hub. Nothing is ever easy. And in the industry, capital destruction continued [Natural Gas: Where Endless Money Went to Die].
So, when will production finally decline? With drilling activities slowing, production should follow, the theory goes. But there’s a laundry list of reason why it hasn’t happened: producers are now only drilling their most productive wells; drilling technologies have become more efficient, such as pad drilling; finished wells that had been shut in due to pipeline constraints or collapsing local prices, including over 1,000 wells in northern Pennsylvania, are coming on line; dry gas production as a byproduct from the booming oil and gaseous liquids plays is surging; etc."
it takes a bit for production to drop if the rig count drops, it could take a few months maybe even as many as 6-7. going into winter i would say production will dip and demand will rise causing a spike to maybe 4.25 in NG. dont hold your breath for much more. there is a TON of NG in America.
One somewhat overlooked cause for the increasing supply is the drilling in the "wet zones" of the various NG shales. There can be quite a lot of NG produced that has entrained liquids and also the heavy hydrocarbons. The heavies are stripped in processing, increasing the value of the production, inspite of the very low value of the NG portion. In fact, there is still quite a bit of flaring of the NG as there is no pipeline for the transportation. So, even though it is the liquid economics that make the investment profitable, the associated NG is still being delivered to the market.
I cannot speak for shale gas generally but in the haynesville specifically i know that decline rates are far, far less than originally thought, primarily due to a program of restricted choke sizing, and to at least somewhat due to increased efficiency in the process itself. I personally have monitored wells that have maintained 200+ mmcf monthly production over two years out from completion with a brief period of severe curtailment for a couple of months when prices were well and truly in the shitter. Further it would seem that this restricted flow allowed the formation pressure to build up and resulted in increased production when the choke was relaxed to what it was previously. The play is still very young and obviously there is still much to be learned, but it is a fact that at least some of these wells are truly monsters that will produce for many years to come. I know of a number of wells in my area that have easily produced over 8 BCF in just a matter of a few years, and at least one that has already made over 10 BCF.
There is a lot of misinformation out there about shale gas, and it does not always pan out the way it is presented, depends on who you listen to. I am not a geologist or anything like that, just an observer that attempts to stay informed on the issue. I think your ultimate conclusion is correct but I would be careful when assessing the ecnomics of shale wells in general terms, as the differnet plays can vary greatly even within thier own boundaries.
I'd still like to know how all those gas companies stayed in busness for decades with wholesale nat gas half the price it is right now.
From 2000 until 2005 I never paid more than $2 per mcf retail from Dominion. Most of the time my bill was $1.38 per mcf. For cooking gas I never had a monthly bill above $10, even with the $5 base charge and taxes. Then deregulation happened and Nat Gas prices exploded like crude oil.
In 2005 we got energy choice and Dominion succesfully lobbied to have the base charge increased to $15, then $25. Since energy choice was dubbed unfair, since Dominion still delivered the gas, a delivery charge was added. It started out at $.25 but has now made its way to $1.68. Now 3 mcf of cooking gas costs about $35 instead of the sub $10 bill six years ago. There isn't a 12 month retail contract available below $5.75, and that's bullshit. Even when gas went under $2 the retail contract never went below $4.50, and that is without the delivery charge and taxes. Add everything and you are almost at $7 per mcf for retail gas.
There is record production, supply far exceeding demand, and record gas in storage. Yet the price is still far higher than the historical average, why?
I would say it has far less to do with the mechanics of the natural gas market and everything to do with the HFT explosion in Nat Gas futures with volume surging 2000% higher.
Instead of trying to flip a paper contract for a profit, maybe the market should be given back to the suppliers and consumers instead of being manipulated by the middle men.
The speculators are the only ones making the claim that nat gas is unprofitable under $3. Just as they claim oil can't be drilled for less than $80. Absolute horseshit. Of course the drillers are happy to oblidge the bullshit story, more profit in their pocket.
The shale drillers are printing money in Ohio and PA. Stories of unprofitable gas drilling are plants by speculators hoping to drive up the value of their contracts. If you bought a contract at $3.40 and it stays at $3.40, you have no profit. If it goes to $3.20, you might be bankrupt because the loss could exceed your levereraged bet. Take out the speculative gamblers and the contract price would settle at what the market dictates. Not the leveraged hedge fund making up for losses in momo equities.
It it cost the driller $1.25 to get the gas out of the ground, anything above that number is profit. If he can't make a profit he isn't going to drill, period. If money couldn't be made, all activity would stop. You think I'd continue to produce my product if I lost money on every unit I sold?
Your mind is going. Delivered retail NG prices were well above $2 throughout the period you mention.
The costs to drill, produce, and deliver the NG today is well above $4 at retail location. It takes about $4 net back to the well to make it a profitable operation. That is just the facts. Many operators are paying over $1.00 for the transportation. Further, many of the new leases have royalty rates of 20% to 25%. Some of the Ohio / Pennsylvania wells in the Utica or Marcellus may cost $2,000,000 to drill and then cost $6,000,000 for the multi-stage frac jobs. These are not "new fields" that were previously unknown. It is the application of the expensive frac jobs that made them capable of high production / recovery rates. If you believe it is profitable to develop, produce, and deliver for $1.25 then there is at least a "first well education" easily available for you.
Anyone running around claiming that NG prices will be substantially below that $4 price will get an eventual awakening. The supply will simply not be there. Producers cannot stay stupid for long and stay in business.
Instead of making shit up, here is data on the cost of domestic gas and oil wells....
http://www.eia.gov/dnav/pet/pet_crd_wellcost_s1_a.htm
Wells now cost ~3 times as much as in 2002...
Fracking shales is the only game left in town for domestic producers and it is literally scraping the bottom of the FF barrel....
We currently have to replace Texas production on a yearly basis just to stay flat....
What happened between 2006 and 2007 that doubled the costs?
My take is that the fraction of wells that were hz. frack jobs started to dominate the statistics....
When Clinton balanced the budget I said to myself, "the banksters will never allow that to go on." Today I say, "The globalists will never allow America to become energy independent."
The troops aren't in Afgahnistan for oil only. They guard the poppies in support of the banksters drug trade.
Clinton's supposed balanced budget was a fiction.
Economy way booming from low energy prices with oil being $10 to $20. Cap Gains taxes based upon the internet bubble and daytrading gave him much more revenue.
Obama plan is to have energy costs skyrocket and destroy businesses so no Cap Gains to tax.
What a fool.
What a crotch of shit. Clinton merely raided social security for money.
Blizzard - I do not think the SS Trust Fund and "investment" mandate work the way you think it works.
That said, it is true that political stalemate, the stock market bubble as well as productivity increases brought by rapidly changing technology, and not Clinton, were mostly responsible for the budget condition.
How about you compare the november contract in april to the november spot today so you don't sound sensational?
How about some mention of NG power plants?
http://triblive.com/state/2760126-74/gas-county-plant-power-company-natural-fired-plants-lawrence-officials#axzz2A5JFdGOy
You didn't read the article, did you? There were a couple paragraphs on it.
Busted! Being first requires some absence of quality control. Judging by his name he's used to that.