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Chesapeake Selling off Shale Gas Assets: What Happened to Cheap and Abundant Gas?

Only two years ago Chesapeake Energy Corp. president Aubrey McClendon was telling us about the limitless future of natural gas in North America. It was going to free us from foreign oil by allowing us to convert our vehicle fleet to run on domestically produced natural gas from vast shale deposits. Technology was now making these deposits accessible, and McClendon offered up "research" done by a nonprofit largely funded by his company that showed that these deposits could power America for another century.

It is a good thing that McClendon, who still runs Chesapeake, isn't taking his own advice these days. Back in mid-2008 when natural gas prices leapt above $13 per thousand cubic feet, the company was riding high as the darling of the shale gas drillers.

Since the crash in late 2008, natural gas prices have been mired in the $3 to $4 range, not high enough to justify the high costs associated with most shale gas drilling. And that means, of course, that natural gas drilling is taking place only in those spots which are deemed easy enough and cheap enough to exploit profitably at these prices. Gas drilling rig counts in North America slipped from more than 1,600 at the end of August 2008 down to fewer than 700 during the worst of the bust in mid-2009 and settled at 906 last week, according to Baker Hughes.

In testimony before the U.S. Congress in 2008 McClendon said to our elected representatives: "Many of you think of our industry as being part of the 'oil and gas industry' and therefore attached at the hip to the oil industry. However, nothing could be further from the truth." (PDF) He went on to say:

Imagine tomorrow if your hometown or national newspaper proclaimed that you had introduced a plan that would, in one stroke, cut gasoline's cost in half, reduce our oil imports, improve our air quality, enhance national security, strengthen the dollar, reduce greenhouse gas emissions and create tens of thousands of new jobs in the U.S. in the automotive, truck, steel, natural gas and related industries. The papers might say you just have changed the course of American history.

It was an inspiring vision even if delivered in a somewhat obsequious manner. With the high-minded help of America's domestic natural gas drillers, the country could free itself from the tyranny of oil, McClendon told the House Select Committee on Energy Independence and Global Warming.

Fast forward to today. So poor is the natural gas business now that McClendon has decided to sell off a good portion of Chesapeake's shale gas assets in order to concentrate on oil trapped in shale. Why? Because the price of oil is so much higher relative to natural gas, proving that price is the key driver in exploiting hard-to-get hydrocarbon resources. Since McClendon's 2008 testimony, the natural gas industry seems to have been rejoined at the hip to the oil industry (or perhaps it was never really separated). So much for cheap, abundant natural gas for the next century. So much for freeing ourselves from the tyranny of oil.

In truth, I don't blame McClendon for doing what he's doing. His job is to make money for his shareholders, and unlike many presidents of public traded companies, McClendon owned a huge stake in the company before a margin call nearly wiped him out. Since then he has bought back about 900,000 shares according to Chesapeake's latest proxy statement (PDF). Before the margin call he owned more than 33 million shares representing about 5 percent of the company, far more than most corporate chief executives.

But just because McClendon's interests are aligned with his shareholders doesn't mean they are aligned with the interests of the American public. And, the notion that a self-interested energy company executive can give solid advice to Congress about long-term policy is nonsense. Of course, policymakers need to collect information from the oil and gas industry in order to understand our current energy situation. But that is altogether different from expecting objective policy advice.

So, where does that leave us with respect to natural gas in the United States? We are not quite back to where we were before the shale gas boom. But domestic natural gas supplies aren't going to be as plentiful as previously believed. The shale gas boom that had seemed to raise U.S. domestic gas production by 11 percent turned out to be a mirage. The U.S. Energy Information Administration (EIA) announced in early 2010 that as a result of poor methodology, it had been overestimating U.S. domestic gas production by (surprise) about 10 to 12 percent, almost the same amount as the growth attributed to the shale gas boom.

And, the same agency--an agency known for its persistently optimistic energy supply forecasts--now shows domestic gas production stagnant through 2020 and barely meeting tepid growth in demand through 2035. (The EIA has been known in the past to simply match production to projected consumption and assume that supplies will somehow come from somewhere.) The stated reason for the less-than-buoyant projection is that growth in shale gas production is expected only barely to offset declines in production from other sources of natural gas.

Natural gas prices are low now because the U.S. economy remains in low gear. Should it accelerate to high gear, count on much higher natural gas prices as demand picks up. Then perhaps we'll have a shale gas boom again followed by a bust.

Both the murky projections of future natural gas supplies and the wildly cyclical nature of the industry make it a questionable platform for energy security. What America and the world needs now are new steady, dependable and climate-friendly sources of energy, sources as steady as the rays of the sun and as clean as the wind on plains.

By. Kurt Cobb

Source: Resource Insights




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  • Anonymous on March 02 2011 said:
    I am in my late 20's with a significant amount of my savings (not retirement) in CHK stock. I was lucky and got in well after the bottom fell out and have enjoyed recently seeing it go from 24 to 36 now back to 34. I dont plan on selling this stock for a long time because I think the switch to natural gas is inevitable and when it does the natural gas companies will skyrocket. I got nothing but time; actually kind of hope it drops back under 30 so I can buy more.
  • Anonymous on March 03 2011 said:
    The vision was a good one. I would think it would be the perfect place to put the economic recovery money that I know congress is going to spend anyhow. The only problem I see is the need to bring "Big Oil" on board and show enough Senators how they can get some pork out of this and its off to the races. Adding natural gas dispensers at "Gas Stations". Conversion kits for gasoline engines. It would create a whole new industry and would probably "fuel" the recovery all by itself.
  • Anonymous on March 14 2011 said:
    Steve, I am also in my late 20's and just started putting my savings into CHK. I bought just under $34 and still am, I think we are in good hands.

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