The calm before the storm
As domestic natural gas prices trend downward to new lows, and companies like Chesapeake Appalachia announce cutbacks in production, an increasingly common refrain with regard to natural gas drilling in our area is “what’s the hurry?” There’s obviously such a national glut of natural gas at existing production and consumption levels that it will be some time before new wells are needed—or indeed, become economic, with current gas prices well below the costs of production. Companies that drill now are not only losing money for themselves, but minimizing the royalties of the people from whom they have leased, whose mineral assets are being sold at rock-bottom prices.
We certainly agree that the “what’s the hurry?” argument holds, especially for organizations like the Delaware River Basin Commission and New York State Department of Environmental Conservation, which need to take the time to be sure that the environmental risks of horizontal hydrofracking are adequately studied, and accurate assessments are made of the activity’s economic benefits and the balance between those and its economic, social, environmental and health costs.
But there’s another conclusion that is sometimes drawn from the current price environment that we would caution against: the idea that we can relax for a while because nobody is going to even bother to try drilling here anytime soon. Any such complacency ignores, among other things, the international aspects of the gas drilling picture: specifically, the fact that prices abroad are stupendously higher than here; that as domestic drilling companies languish, international companies have been aggressive bidders to buy or merge with them, or obtain rights to their leases; and that permitting for liquefied natural gas (LNG) export terminals began last year and can be expected to continue at an accelerating pace.
Notwithstanding the “patriotic” arguments for natural gas drilling—that it somehow will free the United States from bondage to foreign control of our energy supply and its pricing—natural gas is becoming increasingly an international commodity. Indeed, as noted in the Oil and Gas Financial Journal of 2011, “The Chinese are willing to pay a premium to secure North American resources to feed the growing Asian economy.” Natural gas must be liquefied in order to be shipped abroad and, until recently, existing LNG terminals in the U.S. were permitted only for domestic purposes. That has now changed. The first U.S. permit to use an LNG terminal for export was approved last October. Seven more applications are pending. Jointly, according to Deborah Rogers, a financial analyst who has served on the Advisory Council for the Federal Reserve Bank of Dallas since 2008, these applications commit fully 20% of our shale gas supply for foreign export. And that’s just the beginning.
What makes such shipping abroad feasible is the differential between U.S. and foreign gas prices: about $15 per million BTU in Asia, for instance, compared to about $2.50 per million BTU here. According to Rogers, even including freight, the cost of LNG shipped to Asia would be only $9 per million BTU, netting a tidy $6-plus per million BTU profit for the natural gas companies.
No wonder then, that even as news of domestic companies’ indebtedness mounts, foreign suitors have apparently been champing at the bit to buy into unconventional shale properties like the Marcellus. There were $8 billion worth of such deals in the first two weeks of 2012 alone.
Obviously, the idea that natural gas is the all-American energy source is quite wrong; it is increasingly owned by foreigners, destined for foreign use and, as more is siphoned off for export, domestic prices will tend to rise toward international levels. The situation can be expected to get worse as more international firms rush in to buy at current bargain-basement prices.
For those who are against natural gas drilling in our area, this period of declining prices can all too easily become a time to become complacent and let the issue drop off the radar. For those who favor drilling, it can all too easily become a time to seek to hasten drilling at all costs, without heeding who controls the leases or where the asset is going. Both sides would do well to keep their eye on the ball and pay attention to the international context. The seeming respite we are getting from low prices may well just be the calm before the storm.
[For a full video presentation by Deborah Rogers on the economics of gas drilling, visit shaleshockmedia.org/2012/02/07/deborah-rogers-economics-of-fracking-full-talk/.] The calm before the storm