Musings: Is Natural Gas Heading for a Repeat of the 80s & 90s?

(page 3 of 3)

Exhibit2"

As we commented at the start of this article, we have seen industrial and agricultural groups (primarily fertilizer companies) in the past rail against governmental efforts to allow natural gas to be sold for use in fueling electric power plants.  These industrial consumers feared that natural gas would be consumed in low-value uses and not available for their companies.  Rather, these objectors wanted gas usage to be restricted and the supplies retained for high-value applications such as in pharmaceuticals and petrochemicals.  This time the shortage fear argument has been flipped to argue that government incentives to boost natural gas consumption in the utility and transportation sectors of the economy will unduly lift gas prices and penalize those industrial and agricultural companies who are heavily dependent on the resource as either a feedstock for their product or as fuel in their manufacturing processes. 

This time the shortage fear argument has been flipped to argue that government incentives to boost natural gas consumption in the utility and transportation sectors of the economy will unduly lift gas prices

In the late 1980s when the natural gas shortage argument was first being made, estimates of the amount of gas resources available in the United States were ramping up in response to higher drilling and new gas discoveries.  As these gas supply estimates began climbing, they rose at an astounding rate as ever increasing gas prices drove drilling for and development of huge new supplies. 

Exhibit3"

The most recent estimate of the volume of natural gas resources available in the United States supports the high estimates made nearly a decade ago.  The dramatic rise in reserve estimates since the late 1980s can be directly tied to the decontrol of natural gas prices.  Last year the Potential Gas Committee at the Colorado School of Mines, an independent industry research group charged with assessing the amount of natural gas resources available in this country, said that we have 1,836 trillion cubic feet (Tcf) of gas.  When added to the DOE/EIA’s estimate of 237 Tcf of proved gas reserves, a total potential supply of 2,074 Tcf is implied.  Of this potential supply, some 163 Tcf is represented by coal bed gas while the balance is conventional natural gas.  Of the conventional volume, more than a third, or 616 Tcf, is contained in the various gas shales that underlie most of the conventional oil and gas producing basins in the country.  Higher gas prices and improvements in two technologies – horizontal drilling and hydraulic fracturing – have enabled producers to better develop these resources. 

Of the conventional volume, more than a third, or 616 Tcf, is contained in the various gas shales that underlie most of the conventional oil and gas producing basins in the country

Since the Potential Gas Committee study presented the organization’s estimates as of the end of 2008, the successful development of additional gas shale formations since then may point to potentially even larger supply volumes.  A recent report suggests that the Marcellus shale that underlies the area of Central New York,

Exhibit4"

Western Pennsylvania, West Virginia and part of the eastern half of Ohio could contain as much as 500 Tcf of gas reserves, or nearly 80% of the estimate for all gas shales by the Potential Gas Committee at the end of 2008. 

Exhibit5"
The idea that the United States is awash in gas supplies due to the success of gas shales may prove equally short-sighted

We are in agreement with one point the agricultural and industrial letter-writers made, which is that the government should not be in the business of picking “winners” and “losers” by instituting mandates and/or incentives.  Instead, we should let the free market work.  On the other hand, we caution that the basic premise upon which the incentives are based may prove wrong just as corporate America was wrong about gas shortages impacting its businesses in the late 1980s and 1990s.  The idea that the United States is awash in gas supplies due to the success of gas shales may prove equally short-sighted.  Having the resource available is one thing.  Having the resource available at an affordable price may be something entirely different.  There are serious reservations about views that gas shales are profitable at gas prices of $4.50 - $5.00 per Mcf.  Revamping a significant sector of our economy to be fueled only by natural gas based on potentially flawed assumptions could prove devastating for Americans in the future.

 

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.

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