Thursday, October 15, 2009

Good Article in Business Week

There was a good article last week in Business Week about natural gas and how its emergence has changed the business landscape, especially for utilities. In particular, the article focused on increased use of natural gas in power generation, both as a replacement for coal and as a complement to alternative energy sources.

The article noted a couple of utilities that opted to upgrade existing coal plants to natural gas. I like the concept, but a big part of the logic behind the decision is the belief that natural gas prices will be relatively low for the next decade. Big shale plays like the Haynesville should be able to survive and thrive in that price environment, but it might take a significant toll on conventional drilling, formerly the backbone of the industry that still supports legions of small independent producers that created today’s domestic natural gas industry.

With the emergence of shale gas, the gas industry is undergoing significant changes. An industry once populated with scores of small producers is now dominated by a few very large producers. It will be interesting to see how the little guys fare over the next decade.


Anonymous said...

From page 92 of that Chesapeake Investors presentation.

A substantial majority of the ~85% of U.S. natural gas production that is non-shale needs
$7-9/mcf NYMEX prices to be economically viable for enough drilling to stabilize rapidly
declining non-shale production.

It looks like even Chesapeake sees the need for the conventional/tight gas business. It's the only way to keep prices and production stable. Otherwise the gas producers and users will be playing the natural gas price/production accordion forever and if that happens nobody will ever convert. This is why conversion in the past has been so slow, that music of uncertainty of that dam natural gas accordion, ie. the yo-yo prices of the last 7 years. Industry needs a more stable price and supply to make investment worthwhile and as Chesapeake states "to stabilize rapidly declining non-shale production".

PS: I used Cheasapeakes targer of 1.5 BCF/YR produciton per well and calculated they would need to drill 1400 wells in the Haynesville/Boosier shales to make up for the production declines (6 BCF/DAY) in the US so far this year alone. The produciton decline is only going to get worse with the lower drilling elsewhere in the US.

Anonymous said...

Forgot to add

It looks like the Barnett shales produciton has peaked and will be flat this year.

So the only shale-gas area where production is increasing is the Haynesville area.

Robert Hutchinson said...

I agree about the need for price stability. Right now it's the best arguement that the coal industry has over gas and their lobbyists are pushing it hard.

The shale decline rates are bedeviling. I think you are going to hear a lot more about the need to constantly drill as an arguement against gas. Perhaps it is better to be on the drilling services side of the business rather than production given the need to constantly drill?

Thanks for the comment - RH