Havoc and Opportunity in Natural Gas

Wolf Richter's picture

Wolf Richter    www.testosteronepit.com

The Electric Power Monthly April 2012 by US Energy Information Administration (EIA) is a showcase of the monumental consequences of the price of natural gas that has dropped to levels not seen in a decade. The fourth warmest winter on record, which curtailed the use of gas for heating, coincided with record production in the US. And now there are concerns that storage facilities, which are filled to record levels for this time of the year, may soon reach capacity, forcing the industry to flare excess gas. This, doom-and-gloom theorists go, will force the price of gas to near zero in the US.

In the international markets, natural gas is a pricy commodity. Japan, for example. It will soon take the last of its 50 still functional nuclear reactors off line for scheduled maintenance (four reactors were destroyed at Fukushima Number One). But due to local opposition, none of the reactors have been brought back up yet. Faced with Third-World-like power shortages, the country is looking at every alternative available, including the reactivation of gas-fired power plants, no matter how old they are. To feed their appetite, Japan has to import liquefied natural gas (LNG) from countries that have invested heavily in liquefaction plants that convert gas into a liquid state before loading it on tankers.

But the US, the largest producer of natural gas in the world, doesn’t yet have liquefaction plants and cannot export natural gas, though it has import terminals for LNG—now used for storage. Hence, even in our globalized economy, this one-way isolation of a major resource in the US has produced a mind-boggling price difference: natural gas for the Japanese markets recently traded at $16.50 per MMBTU, while at the Henry Hub it traded at $2.28 per MMBTU.

But the low price of natural gas in the US has begun to shift the energy portfolio of the electric power industry in dramatic ways. The Electric Power Monthly April 2012, which compares February 2012 to February last year, isn't as current as the EIA’s weekly update, but it contains a plethora of detail that document the monumental shift to natural gas, among them:

  • Coal-fired generation dropped 17.7% to 113,831 GWh, for a 36.7% share of all electric power generated, down from last year’s 44.1%. The old saw that 50% of the electricity generated in the US comes from coal no longer holds true, for now.
  • Gas-fired generation jumped a phenomenal 38.6% to 91,260 GWh, increasing its share to 29.4% from last year’s 21%.

This massive switch from coal to natural gas will continue as long as the price of gas remains low—along the way accomplishing what environmentalists have long sought but failed to accomplish: reducing the US’s reliance on coal for power generation.

At the same time, the low price is wreaking havoc among energy companies, and those that can are switching from drilling for gas to drilling for oil and natural gas liquids (priced similar to oil). At the 2008 peak of the gas drilling bubble, over 1,600 rigs were drilling for natural gas in the US. Then the rig count plunged. Last summer, it stabilized at around 900, but since then, it has been in free fall. By last week it had dropped to 613 (Baker Hughes). A clear sign that the current price of natural gas is not sustainable.

However, due to the significant delay between dropping rig count and dropping production, production volumes will continue to be strong, and the pressures exerted on the industry—while power generators are laughing all the way to the bank—may not yet have reached the level of maximum pain.

This is the force of creative destruction. The invention of fracking and the constant improvement of the technologies involved gave the oil and gas industry access to an immense natural resource in the US. Enthusiasm for it created a drilling bubble and production levels that, as far as natural gas is concerned, exceeded demand. The victims, if we can call them that, have now become visible: energy companies focused on natural gas, coal companies, the solar industry, companies that build wind turbines.... the list is long. None of them can thrive with natural gas at current prices.

Even President Obama has made dirt-cheap natural gas a cornerstone of his energy policy. But investors are bloodied, and drilling activity is falling off a cliff. Production will taper off, just as demand from power companies and industrial users is skyrocketing—and the ensuing spike in the price of natural gas will throw a monkey wrench in President Obama’s plans. Read.... The Natural Gas Massacre.

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falak pema's picture

Could the current glut and soft natural gas pricing be influenced by this : Crony Capitalism of first magnitude...

T. Boone Pickens: The Koch Brothers Alone Are Thwarting US Energy Policy - Business Insider

A similar debate occured about the Pipeline from Canada to Cushing which got curtailed by O'bammy, where Warren Buffet and Koch Brothers were on opposite sides of the fence...


An interesting article about Texas and renewable energy  :

Wait, WHICH State Leads The Country In Wind Farm Production? - Business Insider

El Gordo's picture

Hey, as long as my AC is running, my cable isn't cut off, and my big screen TV will light up, who cares what Obammy is doing.  Now where's my FEMA card.

css1971's picture

See! All problems solved. 100 years supply!

(At current usage rates, assuming zero growth)

Uchtdorf's picture

If natural gas is good for America, I'm sure the Dept of Energy will pass it.

adr's picture

Yes , please lets get speculators bidding on contacts for no other purpose than to bid the price up again. Maybe we can back to $15 per mcf rates.

At $5 per mcf it costs about $150 per month to heat a 1500 sq ft home with forced air heat during the winter months, even with a 90% efficient furnace. It costs about $25 to heat water for a month.

Any increase in nat gas rates destroys consumer purchasing power and drives thousands into foreclosure. At $10 per mcf you are loking at $300 a month to heat a home. When nat gas peaked some people were paying $500 a month for heat. How is that good?

I've about had it with the argument, don't complain about high comodity prices make money by investing in them instead. How about we just decide to not place purely speculative for profit bets in the first place.

Clowns on Acid's picture

adr- back to the rubber room for you. Prices should be determined by supply and demand

Are you suggesting another pricing mechanism? If so print it, if not...STFU.

Augustus's picture

Two somewhat long range beneficiaries of the low NG prices will be:

Methanex as the methanol produce.

Dominion Power as an LNG exporter.

tempo's picture

NG fracing generates enormous reserves w/o any growth in market demand so prices drop. Drilling continues at manic pace because of large sunk cost (leases)and profitable liquids that can be stripped. How low can NG prices go..while in the old days gas was flared,...it had zero value. Then the US industrialized and NG price increased. Now with outsourcing all mfg the demand has disappeared and the incremental value of NG is near zero. Using compressed NG for cars and trucks is a pipe dream. Just think of the problems you have when you have a gas leak at your home. Its red tagged and you must call in specialist. Now go to refil you NG tank under pressure and the sensor shows a leak. You are red tagged and the car is towed for $4000 of work. No thanks.

brettd's picture

Na. It's a quick fix.  Just trade out the tank.  

99.95 at Auto Zone.

Hueco Kid's picture

The board of directors should resign.

Sutton's picture

Back to Seattle for the basketball players.

Fedaykinx's picture

production has plateaued and rigs are at @10 year low all while the switchover continues apace.  the storage graph still looks like it could take a couple of years to normalize, maybe more or less, depending on what happens.

steve from virginia's picture


Another boom and bust cycle in the natgas business. Certainly not the first time.

A colder winter and less wells (and rapid depletion of frack wells) will have gas prices 'back to normal' soon enough. Bullish on gas is a reasonable call even w/o export terminals and massive switchover to gas generation.

What holds gas prices down in US:

 - decliniing residential use for heating (no gas distribution in many areas, less development in general and increased deployment of 2d generation heat pumps).

 - declining industrial use as more consolidation in the sector.

 - declining utility demand (unemployment cuts demand for electricity).

 - Wall Street finances booked 'reserves' which can only be had by producing wells regardless of the effect of the added wells on the market. This dynamic held US crude prices low for decades  -- and Texas Railroad Commission production quotas.

What will really strangle gas business is increasing cost of new wells. If well-head price cannot service the debt taken on to finance drilling there will be no drilling.

sangell's picture

This may change everything. Of course it has to sell for more than $2 bucks per million btus




solgundy's picture

barack hussain obama.."I will fundamentally change this country"......wtf don't you understand about this marxist muslim??????

Augustus's picture

Who knew that having a black muslim astride the Dumpocrap Donkey would cause the output of shit to increase exponentially?

seventree's picture

The gas surplus puts me in mind of the Sorceror's Apprentice (starring Mickey Mouse). Of course many of the fracking pioneers have since cleared out with their fortunes by flipping wells to the now hapless new owners.

One thing I'm sure of - no US company will invest in liquifaction without risk-free government guarantees. What's good for nuclear is good for all.


ReactionToClosedMinds's picture

good ZH post & good comment .... am sure this argument is already being made to Team 44 which i s'learning' the energy biz fast.   For 2 decades energy was a dead dog due to end of cold war transition and resources & labor of captive bolshevik markets capitulating into our yankee arms for bread & moolah.  Those days are fast ending & long gone.

Then you have Putin back in the full driver's seat in Russkieland.  Ha can't wait to make Germany his 'partner' ......lol

Some day we will tell stories to the kids about how Walmart/Costco/Home Depot sold expensive stuff for like what seemed 1/3 the actual copst ... how did they do it?

Alea Iactaest's picture

Can someone please explain the takedown on CHK over the last couple of weeks?


Starting with the "outing" of McClendon's well participation program, his sweetheart loans by a captive company, the "surprise" miss on earnings yesterday (even though anyone could guess profits might be down YOY given the falling price of natty), and today's news about McClendon's hedge fund we've heard a constant flow of bad news. Maybe the hedge fund piece is new information but the others were all known by institutions even if not the subject of WSJ headlines.


Given CHK's levered balance sheet and the fact that the company was already selling assets into a depressed market these latest "revelations" likely will accelerate the pace. So even though the company has proven almost as adept at discovering new financing methods as it has producing wells, the company is levered up. Any more hiccups could push its balance sheet over the edge.


All of this seems a little too orchestrated for those of us who don't really believe in coincidences. The choices that I see are that someone:

(a) Wants to push CHK into a fire sale situation -- and stands to benefit from the resulting bone picking

(b) Really has a grudge against McClendon

(c) Has a big short position

(d) Wants to shake out retail and pick up shares on the cheap

(e) All of the above -- or some combination


Of course maybe this is all explained by shitty management and board oversight and the company deserves to go BK. This seems the least likely in my mind for company that has an almost $11Bn market cap even after today's sell off.

Augustus's picture

CHK has as much debt as XOM.

CHK has large assets of undeveloped leases which they paid tremendous prices to acquire and get signed.  The company has $2 billion in cash and a capex budget of $10 billion.  If they don't drill those leases they expire worthless.

The leases will likely be developed into successful wells, just at a cost that cannot be recovered at today's gas price.  Whatever they have done to try to get more "oily" has not accomplished much.

McClendon has done a number of wild things to build the company.  It is comming back to bite him - AGAIN.

How about running a hedge fund on the side speculating on energy prices?

pemdas's picture

You covered it well.  I would add CHK went into the downturn poorly hedged.  Also, according to some analysts (WSJ article), the company has billions of off balance sheet liabilities.  I have heard some analysts say their balance sheet is opaque to the point of being unintelligible.

Based on my 45 years of experience, about the riskiest thing you can own is a highly leveraged energy company.

ReactionToClosedMinds's picture

not to digress from CHK woes which was summed up well by above poster ...

...but don't you think some major 'credit' sources were off-balance sheet leveraged to the hilt for commercial RE projects?   I am pretty ceertain some 'gentleman's agreements' exist en masse forcing 2nd tier developers and large sub-contractors to explode their own balance sheets so big guys look ok.

If the economy swoons agin, look out for alot of covered up distressed commercial RE to bob to the surface ala Bernie Madoff.


disabledvet's picture

just drove by one of our better used car dealers and they had a 70,000 dollar Jaguar sports car for sale for ten grand (used.) car was in CHERRY condition. in fact cars of all stripes are popping up for sale. it sure feels like "the folks" are truly running out of money. i really have a hard time believing prices can be maintained going forward. "attacks on Egan Jones." they shut down what's her name with her negative calls on the muni's and the banks. I do look forward to hearing Jamie Dimon speak because even though i'm not a big fan of JP Morgan the bank i'm a huge fan of him personally. Having been fired by Sandy Weill "back in the day" i think he more than anyone understands what's at stake...hopefully the bullshit really does stop with him. we shall see...

pemdas's picture

I totally agree.  A lot of commercial real estate lenders are praying for an uptick in rents so they don't get handed the keys to the building.

Stuck on Zero's picture

Someone is going to very rich going long in nat gas and then investing in a gas to methanol plant. Methanol runs directly in most cars as an additive from 15% to 85%.




Alea Iactaest's picture

It's also not very hard to convert a gasoline engine to run on natural gas. Honda even has an OEM Civic right now, although the range is a little on the short side.

Sequitur's picture

There's cars even better than that. GM and Chevy are going to sell cars that run on both gasoline and natural gas - and seamlessly switches between both fuels. I'm bullish on natural gas, and it's one of the few bright spots for the U.S.


"The trucks have two tanks, and drivers can choose which fuel they want to use; if they run out of one, the vehicle automatically switches to the other.

The ability to run on either fuel is an important step for winning over new customers who might be interested in the cost savings from the significantly cheaper compressed natural gas (CNG) but worry about running out of fuel and not finding a compatible station, said Joyce Mattman, director of commercial product and specialty vehicles for GM.

There are only about 1,000 fueling stations across the country that sell CNG, with roughly half of those open to the general public. But despite the limited CNG stations, almost all the natural gas vehicles sold in the U.S. are CNG-only due to tax breaks that weren't available for bi-fuel vehicles, said Richard Kolodziej, president of Natural Gas Vehicles for America, an industry trade group.

Because of that, there were only 112,000 CNG vehicles on U.S. roads at the end of 2010, the most recent figure available. And a large percentage are heavy-duty vehicles that return to a base each night to refuel, such as city buses, delivery trucks or garbage trucks.

The cost savings of using CNG instead of gasoline is marked. The amount of CNG that is equivalent to a gallon of gasoline now sells for between $1.50 to $2 less than a gallon of regular gasoline."

Stuck on Zero's picture

I heard that someone is selling a small CNG unit for your house.  It sits in the garage, runs on 110VAC, and you can fill your CNG car at home at night.  No road tax dudes!