Obama Discovers Natural Gas
Another election-year transformation.
A re-election campaign is a terrible thing to waste, and this year's race is already producing miraculous changes at the Obama White House: The latest example of a bear walking on its hind legs is the President's new embrace of . . . natural gas from shale.
Last week the White House issued its latest report on jobs and it includes a section on "America's Natural Resource Boom." The report avers that a few years ago there were widespread "fears of a looming natural gas shortage," but that "the discovery of new natural gas reserves, such as the Marcellus Shale, and the development of hydraulic fracturing techniques to extract natural gas from these reserves has led to rapidly growing domestic production and relatively low domestic prices for households and downstream industrial users."
Please pass the smelling salts to Interior Secretary Ken Salazar and Lisa Jackson at the Environmental Protection Agency.
To the best of our knowledge, this is the first time the White House has favorably mentioned the Marcellus Shale, the natural gas reservoir below Pennsylvania, West Virginia and other Northeastern states. And now he's taking credit for this soaring production.
As the White House report puts it: "Of the major fossil fuels, natural gas is the cleanest and least carbon‐intensive for electric power generation. By keeping domestic energy costs relatively low, this resource also supports energy intensive manufacturing in the United States. In fact, companies like Dow Chemical and Westlake Chemical have announced intentions to make major investments in new facilities over the next several years."
And that's not all: "In addition, firms that provide equipment for shale gas production have announced major investments in the U.S., including Vallourec's $650 million plant for steel pipes in Ohio. An abundant local supply will translate into relatively low costs for the industries that use natural gas as an input. Expansion in these industries, including industrial chemicals and fertilizers, will boost investment and exports in the coming years, generating new jobs."
We checked to see if someone slipped a press release from the Natural Gas Council into the White House report by mistake, but apparently not.
The report does add the obligatory disclaimer about hydraulic fracturing that "appropriate care must to be taken to ensure that America's natural resources are extracted in a safe and environmentally responsible manner" with safeguards "to protect public health and safety." But no one disagrees with that.
The catch is that this endorsement runs against every energy policy pursued by the Obama Administration for three years. The Institute for Energy Research reports that royalties from oil and gas drilling have fallen more than 90% since 2008 because of Interior Department permitting delays and rejections.
The EPA recently issued a flawed report on groundwater contamination that could shut down the fracking process the President is now touting as a jobs producer. EPA's political goal is to grab power to supercede state drilling regulation. The industry regards new EPA authority as a real threat to its future.
Each year Mr. Obama has also supported a $40 billion tax hike on the oil and gas industry because, as he put it in 2009, the tax code "encourages overproduction of oil and gas" and "is detrimental to long-term energy security." Even the Securities and Exchange Commission has imposed extensive new reporting requirements on oil and gas fracking companies.
It's certainly smart politics for Mr. Obama to distance himself from the anti-fossil fuels obsessives, and no doubt his political advisers are hoping it helps this fall in the likes of Ohio and Pennsylvania. On the other hand, this could be a one-year wonder, and if he wins Mr. Obama might revert to form in 2013. A good test of his sincerity would be to replace Ms. Jackson and Mr. Salazar.
BY JACK BARNES, Global Macro Trends Specialist, Money Morning (Jan 16, 2012)
I've been watching natural gas for years now and find myself shaking my head lately.
The cost to buy the "clean energy" is collapsing as crude oil, a product that needs refining, stays above $100 per barrel.
In fact, this chart for natural gas is what I call a Widow Maker.
Take a look:
As you can see, it shows the price of the March 2012 NG contract over the past two years - and it's not pretty.
Why Natural Gas Prices Will Continue to Drop
The last time I wrote about natural gas for Buy, Sell or Hold was November 2010.
At the time, natural gas was about to start its most seasonally bullish period of the year. I recommended a multi-month trade with an exit by the end of the March 2011 contract.
However, this year is completely different. Natural gas has collapsed in price instead of climbing during the peak winter cold months.
While it's been a warmer than normal winter across the United States, especially in the Snow Belt, this price drop has more to do with U.S. production rising on a year-over-year basis than it does the weather.
Ordinarily, the ratio of gas to oil on a BTU basis is 6.1. Today, with natural gas selling for $2.65 or so and crude over $100, though, the same ratio is currently 37:1 - not even close to the historical benchmark.
The next chart explains why natural gas pricing is going down and will stay down longer than most people expect.
Currently, the number of natural gas rigs is still climbing in the Eagle Ford area, while remaining level in the Bakken and Marcellus shale formations.
Why this matters is simple: These rig counts will have an impact on U.S. natural gas prices far into the future.
Eagle Ford shale wells, while called "gas," have a "wet sweet" production profile. In other words, they also produce natural gas liquids.
These liquids are super sweet (that is, they are very low in sulfur) and make a great blending stock with heavy sour oil, allowing producers to take two products derived at sub-spot crude oil prices and blend them into a West Texas Intermediate (WTI) equivalent.
Again, these wells are being drilled for their crude oil-like liquids rather than their gas, at close to $100 a barrel for crude versus about $2.65 for natural gas.
The kicker? They typically have to produce the gas anyway to lift the liquids out.
As a result, the natural gas market stays saturated with new incremental supplies, which works to keep natural gas prices low.
I expect this trend to continue into 2012, making higher natural gas prices unlikely.
Oversupply: A Glut of Natural Gas
A bit of history shows us why...
Before the buildout of natural gas combined-cycle power plants in the 1990s, the United States had a yearly glut in gas. Producers actually shut down their production wells for months at a time.
What's more, there was no takeoff capacity to produce more gas, since the pipelines were full and the storage facilities were maxed out.
Today, we have returned to a similar environment.
In fact, the United States has a large selection of individual natural gas basins and prices are rarely the same in each, due to pipeline takeoff capacity and other similar factors.
As a result, we could see individual basins with a short-term price of $0.00 per Mcf (1,000 cubic feet) this summer. That's no typo. The cost of natural gas in certain places could go to zero.
Further, I expect to see un-hedged natural gas producers go bankrupt this fall, since the cost to carry production on leased lands exceeds the value of the cash flows from the fields.
You see, natural gas will be worthless to its producers for a period of days or weeks at a time.
This will impact the top and bottom lines of companies that have to produce, let alone sell, into that environment.
There may even be localized negative rates created when a company has to produce from lease properties or return the ownership to the mineral rights holders.
It is a case where companies put millions into drilling wells on a ranch and then can't sell their product because there is no market for it.
The Long Term Outlook for Natural Gas
I don't expect to see a clear trend change in natural gas prices until 2013 or later depending upon the buildout of U.S. liquid natural gas export capacity.
The U.S. government has received a growing list of requests from LNG import facilities, to allow them to be converted into LNG export facilities. These conversion projects will start to come online in 2015. So far there have been plans submitted to export the equivalent of 17% of the United States' daily natural gas production, but for now that production has to sell within the United States - or not.
If all of these facilities are built, the United States could be the world's largest liquid natural gas exporter by 2020. Just a few years ago the United States was projected to be the largest consumer of liquid natural gas by 2020.
Needless to say, the swing from one extreme to the other has been staggering.
In the meantime, smart investors will stay out of the way of the Widow Maker. Expect natural gas prices to stay low for 2012 and beyond.
It is also time to start considering the impacts that a natural gas glut will have on the companies providing drilling supplies to the exploration and production (E&P) companies.
Some high-flying stocks in the O&G service sector will be negatively impacted when the rush to drill and frack a shale well is over. The golden days of the shale rush are just about over and with that, a return to gravity for some of these high-flying stocks.
January 12, 2012
Source: LAWRENCE MESSINA - Associated Press Writer , The Intelligencer / Wheeling News-Register, Jan 12, 2012
CHARLESTON - West Virginia would slash property taxes in exchange for a new "cracker" plant and reserve funds to improve roads, schools and high-speed Internet access, under proposals Gov. Earl Ray Tomblin offered the Legislature in his State of the State address Wednesday.
The Logan County Democrat urged lawmakers to help the state compete with neighboring Marcellus producers Ohio and Pennsylvania for the 12,000 manufacturing jobs estimated to accompany such a petrochemical processing plant. He cited how the industry already has welcomed what it considers a clear set of rules for West Virginia Marcellus operations, approved in last month's special session. The Marcellus shale field is considered among the world's richest natural gas reserves.
Tomblin didn't detail his plan to lawmakers for attracting the plant to West Virginia. But in a prior interview, Tomblin said his proposal would shrink business property taxes for 25 years for any employer that invests at least $3 billion in a new plant. This highly sought facility would convert a byproduct from Marcellus shale natural gas wells - ethane - into a widely used chemical industry compound.
AP Photo Gov. Earl Ray Tomblin waves to the crowd Wednesday before delivering his State of the State address at the Capitol in Charleston.
"I will do everything in my power to make sure that West Virginia is positioned to take full advantage of this opportunity," Tomblin told a House of Delegates chamber packed with legislators, other public officials and VIPs. "I will not limit our efforts to just one project or even two. We will compete for every project, every dollar of investment and every new job that relies on the natural resources with which we have been so blessed."
That's already happening, Tomblin said.
He announced that drilling supplier Baker Hughes will create 275 jobs at a $40 million facility near the state's active Marcellus field. That was among several economic bright spots that also include the Boy Scouts of America holding its 2013 national jamboree and scouting's 2019 world jamboree at its new 10,600-acre reserve in southern West Virginia. The latter - the first time in 50 years that this gathering has been in the U.S. - should attract 80,000 scouts and their families, Tomblin added.
By Mark Niquette and Romy Varghese (January 10, 2012, 12:54 PM EST)
Jan. 10 (Bloomberg) -- Thirty-four years after Black Monday, the day Youngstown Sheet & Tube announced shutdowns marking the end of the Ohio city’s steel era, a $650 million mill is coming to life thanks to the natural-gas drilling boom.
The factory for Vallourec SA’s V&M Star will have 350 workers and produce seamless pipes used in hydraulic fracturing, also known as fracking. It’s part of a development that an oil and gas industry study calculates will mean more than 200,000 jobs and $22 billion in economic output in Ohio by 2015 -- and which has neighboring states looking to get in on the action.
The new mill is rising about two miles (3.2 kilometers) from an injection well for disposing wastewater from fracking that has been closed after 11 earthquakes shook the Youngstown area last year. States that that sit atop shale formations are cashing in on the drilling and the expanding businesses that support it, even as the Ohio Department of Natural Resources reviews the earthquake data and the U.S. Environmental Protection Agency studies the effects of fracking on drinking water with an eye on possible nationwide regulations.
“This will be the biggest thing to hit the state of Ohio economically since maybe the plow,” Aubrey K. McClendon, chief executive officer of Chesapeake Energy Corp., the most active U.S. oil and natural-gas driller, said during an energy summit that Governor John Kasich convened in Columbus in September.
Drillers have turned to fracking -- a process that injects water, sand and chemicals into rock to free natural gas -- in shale formations including the Marcellus and Utica below Ohio, New York, Pennsylvania, Maryland, West Virginia and parts of Kentucky and Tennessee. A boom in production helped cut prices 32 percent last year.
While some shale-gas development is anchored to the drilling sites, states are jockeying for spinoff investments such as a “world-scale” natural-gas processing plant that Royal Dutch Shell Plc said it plans to build in Ohio, Pennsylvania or West Virginia.
All three states say they have offered incentives to Shell, and Kasich flew to Houston in November to hand-deliver letters of support for the project.
“States compete every day for every business they can find,” Keith Burdette, West Virginia’s secretary of commerce, said in a telephone interview from Charleston. “Suddenly, there’s this vast new array of manufacturing opportunities that may be returning to this region of the country, and I think we’ll all be aggressively looking for every opportunity.”
Development of the shale-gas industry is one of Pennsylvania’s top priorities, C. Alan Walker, secretary of community and economic development, said in a Jan. 4 interview in Harrisburg. Republican Governor Tom Corbett has said he wants the state to be the “Texas of the natural-gas boom.”
Texas wants to be the Texas of the gas boom, too. Half of the eight most active U.S. oil- and gas-drilling regions are in the state, according to a December presentation by Pioneer Natural Resources Inc., a Dallas-based exploration and production company.
Oil and gas employment in the state increased by 18 percent to almost 238,000 during the year ended Oct. 31 and now exceeds the peak of the last energy boom in October 2008, according to the Texas Petro Index, a survey compiled by Amarillo economist Karr Ingham.
Bridge to Future
In Youngstown, which has lost more than half the 168,330 residents it had in 1950, V&M Star may help make the area the Utica Shale’s supply-chain capital, said Eric Planey, a vice president at the Youngstown/Warren Regional Chamber.
“I look at it as being a bridge from our past to our future,” Planey, whose father worked at Youngstown Sheet & Tube for 40 years, said in a Dec. 8 interview. “Our past was exclusively steel. It looks like our future is going to be significantly a part of the oil and gas and energy business.”
Even so, an Ohio State University analysis concluded last month that the industry study, prepared for the Ohio Oil & Gas Energy Education Program, “greatly overestimates” the economic impact. Environmental groups, including the Natural Resources Defense Council, say that job-hungry states are moving too fast to capitalize before fracking’s consequences are known.
Vanessa Pesec, president of the Network for Oil and Gas Accountability and Protection in Northeast Ohio, pointed to the earthquakes in the Youngstown area last year that she blames on the disposal well, including a 4.0-magnitude temblor on New Year’s Eve.
“This is a short-term boom with long-term negative impacts,” Pesec said in a telephone interview.
Yesterday, doctors at a conference on fracking in Arlington, Virginia, said the U.S. should declare a moratorium on the drilling process until the health effects are better understood.
David Mustine, general manager for energy of JobsOhio, the state’s development arm, said Ohio has strong regulations and he doesn’t think the complications from fracking will slow development. The state is benefiting from direct investment as well as jobs and lower natural-gas prices, he said. Oklahoma City-based Chesapeake alone has spent almost $2 billion in Ohio to acquire drilling rights, said McClendon, its CEO.
The money that drillers such as Chesapeake are paying landowners for leasing rights and royalties is buoying local economies, said Brad Hillyer, a lawyer in Uhrichsville. Landowners are being paid as much as $5,200 an acre plus royalties as high as 20 percent of the money from gas produced at a well, said Hillyer, who is negotiating leases.
No New Trucks
C.H. McCutcheon, general manager of Elder Ag & Turf Equipment Co. in East Palestine, estimated in a telephone interview that 25 percent of his business this year came from sales of equipment costing as much as $100,000 or more and paid for by lease payments that farmers received.
“If you take a look in western Pennsylvania and parts of eastern Ohio, if you go to the implement dealership, there ain’t no new tractors, red or green, and if you go to the local car dealership, there ain’t no new trucks,” Dale Arnold, director of Ohio Farm Bureau Federation’s energy services, said in an interview from Columbus.
The development “could bring an economic resurgence really to all of Ohio,” Kasich told reporters last month.
The impact is evident in Pennsylvania.
Collections of business taxes from oil and gas drilling in that state from January through November last year increased to $385.2 million, more than double the 2008 tally and a 64 percent increase from 2010, according to the revenue department.
Employment by businesses directly involved in Marcellus shale grew 114 percent in the first quarter of 2011 from the same period in 2008, according to the Pennsylvania Center for Workforce Information and Analysis. Wages in Marcellus industries average $76,036, compared with the state average of $46,222, according to the center.
Pennsylvania wants to attract manufacturing related to drilling to “reindustrialize the state,” said Walker, the economic development secretary, who is former president of Bradford Energy Co.
The big prize is the so-called cracker plant that Shell plans in Ohio, Pennsylvania or West Virginia. An announcement is expected during the first quarter, Kelly op de Weegh, a company spokeswoman, said in a telephone interview. The plant would “crack,” or process ethane from natural gas to produce ethylene, which is used in the chemical and plastics industries.
The company will invest as much as $4 billion, Walker said, an amount he said equals what Andrew Carnegie put in U.S. Steel in the early 1900s.
The project will require as many as 10,000 construction jobs and “several hundred” full-time positions at the plant, op de Weegh said in an e-mail. For every plant job, there would be seven support workers, Walker said.
Walker, Ohio’s Mustine and West Virginia’s Burdette all declined to discuss what incentives their states are offering.
The states also are competing in other ways. In a letter to legislators in November urging them to consider shale bills, Corbett cited Ohio’s “broad and sweeping law” that pre-empts local ordinances and is being used as a “carrot” to draw businesses.
Ohio officials point to predictability in rules “as they continue to attempt to lure Pennsylvania jobs and investment across our western border,” Corbett wrote.
“We are certainly mindful of what the other states are doing,” said Patrick Henderson, Corbett’s energy executive. “The governor is committed to being as competitive as we can.”
--With assistance from David Mildenberg in Austin, Texas, and Jim Efstathiou Jr. in New York. Editors: Stephen Merelman, Mark Schoifet