THE SOURCE - Summer 2016 - (Page 18)

feature Can Natural Gas Stay Cheap Forever This Time? By Aubrey Hilliard, Texican Natural Gas W ith spot priced gas at below $2 and a futures screen that goes out 10 years without putting a $4 handle on any monthly price, has the market pretty well capitulated to the fact that natural gas will be cheap forever? If so, it wouldn't be the first time it has made that assumption only to be surprised by volatility and price spikes. To begin, let's think about how we got here and what it really costs to produce shale gas in America. shale oil and gas reservoirs are no surprise to industry participants. We drilled through them for many years and marveled at the amount of hydrocarbons trapped in them, but also recognized that their lack of porosity and permeability meant that the energy potential in the shale rock 18 THE SOURCE | THE vOICE and CHOICE Of pUblIC gaS would never be commercially produced. The engineers got busy in the late 1970s developing ways to drill horizontal wells and, while that technology was perfected, they also learned to ramp up compressor power to create the giant fracking processes required to pulverize the rock and release the hydrocarbons. Initially, the cost of production was relatively high but fit into the $6-10 gas markets of the mid-2000s. Again the engineers worked diligently to drill longer laterals and multiple wells from one drill pad. Then came bigger fracs, and with all of the improvements, the cost of production fell lower and lower. But, one theme always holds true in the oil patch. Drillers drill, and as long as you give them money, they will continue to drill even if today's economics don't work because their eternal optimism tells them that higher prices will eventually make every well a profitable one. so, in the age of zero interest rates, investors chased higher returns by pouring money into shale oil and gas debt; and after putting $1 trillion to work in the shale oil and gas fields, we are over-drilled. You don't have to be the CFO of an exploration and production company to determine that natural gas is selling below its finding cost. Today, credit rating agencies predict that about 175 exploration and production companies are primed for bankruptcy with over 70 percent of independent producer debt listed as junk. Analysts are revealing that most of the producers in America were not profitable when gas was trading for $3.50. so, where is the industry headed? There is not only a large overhang of gas supply from existing producing wells but also from completed wells awaiting access to pipelines to take gas to market. Then we have about 1,000 wells that

Table of Contents for the Digital Edition of THE SOURCE - Summer 2016

First Person
APGA Events
Expanding Your Network Through the Virtual Pipeline
Major Mergers
Q&A: Barry Russell
The Very Different Field of Commercial Foodservice Research and Development
Can Natural Gas Stay Cheap Forever This Time?
Home Fueling for Natural Gas Vehicles
Legislative Outlook
The Pipeline
Marketing Matters
Advertisers’ Index/
At Last

THE SOURCE - Summer 2016