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2013-03-05 12:00:11
Mar 2nd 2013 |From the print edition
Flare apparent
THE shale gas billowing out of American soil is a source of concern as well as
cheap energy. Environmentalists worry that fracking, the technique for
dislodging gas from shale beds, may pollute the air and local water supplies.
The glut of natural gas has a less likely set of victims, too. Instead of
banking handsome profits, many of the oil and gas firms that drill for shale
gas are suffering from the boom.
Abundant supplies and slow growth in demand have sent gas prices crashing. In
2008 shale gas fetched $12 per million BTU (British thermal units) at Henry
Hub, a crossroads of pipelines in Louisiana that serves as the main pricing
point for the gas in America. Since then the frackers have been hard at work.
From next to nothing shale now provides a quarter of supplies. The rapid rush
of gas onto the market has sent prices tumbling (see chart). After falling to
below $2 per mBTU in early 2012, prices have now nudged back to $3.40. But for
many drillers this is still not enough. Most gas wells require $4 or more to
cover costs.
Share prices have tumbled for firms such as Chesapeake Energy, Devon Energy and
Southwestern Energy. Asset sales to help pay debts racked up by drilling wells
have become the norm on February 25th Chesapeake announced the sale of a stake
in land containing wells as part of its efforts to raise $7 billion this year.
The pain looks likely to persist. Analysts reckon that gas has a sweet spot ,
where drillers can make money while consumers still feel little pain, of around
$5-6 per mBTU. But the economics of American shale beds means getting there
will take time.
To cork the flow firms have shut down some existing wells and stopped
investment in new ones. But some leases with the owners of land that sits atop
reserves dictate that gas (and royalties) must flow regardless of prices.
Intensive drilling in 2010 and 2011 has left a huge stock of wells that have
been paid for but are yet to be hooked up to local pipelines. Some producers
have also contracted to deliver gas at higher prices, which keeps the stuff
flowing.
A quirk of geology is also preventing prices from rising faster. Shale beds can
be dry or wet . As well as gas, the wet wells produce natural-gas liquids
(NGLs) such as ethane, butane and propane. These hydrocarbons are valuable for
making plastic in petrochemicals plants or for industrial and domestic uses
such as firing industrial heaters and barbecues. NGL prices are linked to that
of crude oil, the price of which is set globally (unlike gas) and is high. A
healthy flow of NGLs will cover the cost of wells; the gas, a free by-product,
hits the market whatever its price.
Some drilling rigs have been shunted from dry shales to wet ones, boosting
supplies of this free gas. (The rush to liquid-rich shales has also led to a
glut of NGLs, so their prices are falling: this will eventually mean less gas
and higher prices.) Other rigs have been trucked to shale-oil beds such as the
Eagleford in Texas and the Bakken in North Dakota, which also spew out free
gas. In the Bakken much of it is wastefully flared (ie, burned). Green
completion standards for wells due to take effect in the next two years will
ensure that the gas will be collected and sold, potentially slowing price
increases.
Shale gas is still a relatively young industry. Opportunities for efficiency
gains and cost-cutting abound. That makes lower prices more tolerable for
producers. Energy giants such as ExxonMobil, Shell and Chevron are in for the
long haul and have deep enough pockets to put up with low prices for a while.
And differences in infrastructure can affect local markets so that prices may
deviate from the Henry Hub benchmark.
Statoil, Norway s national oil company, bought a pipeline connecting the
Marcellus shale in Pennsylvania to Toronto in Canada, where gas is around $1
per mBTU costlier. The company is building one to Manhattan for the same
reason.
Exporting liquefied natural gas (LNG) would be another way to deal with the gas
glut. Gas markets are regional. Outside America, prices are typically much
higher. Spot prices in Asia can reach $20. Moving American gas to Asia would
therefore be lucrative, and it is perfectly possible.
America s Gulf coast is lined with plants to turn imported LNG into gas. Built
back in the days when people thought that America would need to rely on
imports, they are now idle. At a cost, they could be converted into plants that
turn American gas into LNG for export.
One of them, Sabine Pass in Louisiana, has an export licence and could start
sending gas abroad by 2015. Sixteen more have applied for licences. But
gas-consuming American businesses object. In the hope of keeping domestic gas
prices ultra-low, they are lobbying the government to block exports. The
government, reluctant to anger both Greenpeace and Dow Chemical, is dragging
its feet. Prices are sure to rise eventually, but not before producers suffer
more pain from the boom they created.