Shale Success Creates Opportunities

No matter where I travel and talk with AAPG members there are two topics that I’m certain will come up in conversation: First the price of natural gas and second the role of shale gas in driving this price.

Earlier this year, natural gas prices sank to new lows in the United States – under $2 per million cubic feet. And while they have rebounded slightly in the past month, the fundamental supply and demand picture provides little hope for a significant rebound in the near term.

This is causing financial distress for several companies whose reserves portfolios are heavily weighted to natural gas and whose gas price hedges (if they had them) are expiring soon. In retrospect, it is easy to question whether these firms made the right strategic decisions. But let’s not forget that in the past decade the United States was concerned about its natural gas supply, fearing that it would be unable to meet growing demand.

The industry pivoted quickly from dry gas plays to plays rich in natural gas liquids (NGL) as prices declined. Prices for NGLs have proved more resilient than methane and drilling activity shifted markedly to these plays.

But while this low price environment is creating hardship for some gas producers, in other parts of the economy it is creating commercial opportunities that will ultimately increase gas demand.

Fortune ran a cover story in April titled “The United States of Natural Gas: How the New 100-Year Supply of Shale Gas is Reviving the U.S. Economy.”

As the article explains, one beneficiary of the shale gas revolution is the petrochemical industry, which uses natural gas as feedstock for its operations. Dow Chemical is building a new plant in Louisiana and restarting another. Meanwhile Shell is building a new plant in Pennsylvania and contemplating another in Louisiana. These plans reverse a long-standing trend, where for years the petrochemical industry had been moving its manufacturing out of the United States.

The potential for liquefying and exporting natural gas is another opportunity that is attracting investment. Several firms that control LNG import terminals built in anticipation of a gas shortage are now being reconfigured and seeking permits to export LNG. They want to take advantage of the fact that natural gas prices are much higher in other parts of the world, notably Asia.

Faced with the prospect of additional emissions regulation, electricity producers must evaluate whether to replace retiring coal-fired power plants with cleaner burning natural gas turbines. It already is happening in some parts of the world. But given the historical volatility of natural gas prices and the long-term life and low cost of coal-fired plants it is not a simple decision.

In the transportation sector, where unlike power plants the asset life is not measured in decades, the decision to switch fuels appears much more clear. Vehicle fleets are particularly suitable for switching to natural gas, and the current price differential between natural gas and petrol provides a quick payback on the investment.

The city of Fort Worth in Texas, as past AAPG president Scott Tinker showed in the documentary “Switch,” is just one of many municipalities taking advantage of this opportunity with its bus fleet. And recently Caterpillar, a large equipment manufacturer, announced that it was teaming with Westport Innovations to introduce natural gas combustion engines into its industrial machinery product line.

The natural gas boom we’ve experienced in the United States is driving new manufacturing, construction and trade opportunities. Collectively these commercial activities support economic growth and create jobs. This is a good thing, although it’s a fact overlooked by those who oppose fossil energy production.

Fact is, the energy sector underpins the global economy and modern life as we know it and creates opportunities for talented people.

It is not restricted to the United States and it’s not slowing down. The International Energy Agency forecast in May that global demand for natural gas would grow by 50 percent by 2035 and overtake coal as the second largest fuel source behind crude oil.

Demand is there. Markets will sort out pricing. So what will it take to ensure the world receives the economic benefits of finding, producing and using this natural gas?

It’s going to take rational commercial and policy decisions. That requires people and policymakers who are informed and educated.

And who will tell them if not AAPG and its members?

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Director's Corner

Director's Corner - David Curtiss

David Curtiss is an AAPG member and was named AAPG Executive Director in August 2011. He was previously Director of the AAPG GEO-DC Office in Washington D.C.

The Director's Corner covers Association news and industry events from the worldview perspective of the AAPG Executive Director.

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