Thursday, February 24, 2011

A New Addiction: Cheap Natural Gas

I am trying to clean up some of the shorter items I have laying about.  This is another sidebar type issue.  It address, in part, the issue of why some of our energy pricing has been able -pre-Libya- to maintain its relatively low pricing.  Below is an excerpt from the pink sheets of the London Financial Times:
By John Dizard, Financial Times, February 13 2011
 “How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
 “What brought it on?”
“Friends,” said Mike. “I had a lot of friends. False friends. Then I had creditors, too . . . ”
The Sun Also RisesErnest Hemingway
Cheap gas is good for Americans now, but it is enabling a growing dependency on gas-generated power that will only get more expensive. In a few years the country could find itself forced to bid hard in international markets for essential supplies.
That’s good news for the world’s producers of liquefied natural gas (LNG). They’ve been waiting for the US to develop as a large importer, and may not have to wait much longer…
The initial production (IP) from shale wells is high, compared with conventional gas wells, but declines rapidly. That puts the shale developers on a wobbly bicycle of high IP, and the continuing high levels of drilling, and high-tech pressure fracturing of the dense shale, necessary to maintain that production. Consequently, the shale producers’ hedging activities have depressed the spot and futures price of gas below the total costs of production for many wells.
The producers will argue that they can break even on many of their wells with prices between $4 and $5 per million British Thermal Units (mmbtu). To which the sceptics reply, possibly, if “break even” excludes costs such as land, taxes, royalties, operating expenses or seismic surveys.
Even more significant is the possibility, or probability in my view, that the gas from shale wells could run down even faster than the companies’ investors or lenders think. Or than the policy tribe assumes when committing to dependence on gas-fired electricity.
The good news from shale gas is front-end-loaded. The bad news is at the back end, which has been pushed out by investor, lender, and joint venture cash. Now, though, activity in previously hot shale plays is levelling off or declining….

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