With crude oil prices around $80/barrel, natural gas should be priced at about $13/thousand cubic feet. That’s the historical formula because a barrel of oil contains about six times as much energy as a thousand cubic feet of gas. But U.S. natural gas prices at the Henry Hub are below $5/thousand cubic feet, and U.S. gas storage facilities are full to near-bursting.
For gas producers like Chesapeake (CHK), Devon Energy (DVN), CNX Gas Corp. (CXG), and the major oil companies like Exxon Mobil
(XOM), ConocoPhillips (COP) and Chevron (CVX), the depressed prices hit the bottom line hard. Yet there’s a chance that gas producers will be able to turn things around.
The key is extracting natural gas trapped in shale rock about 5,000-10,000 feet below the surface. Once believed to be uneconomic, in the late 1990s, a company that is now part of Devon figured out a way to release the gas by fracturing the shale under pressure by injecting water and chemicals into the well.
The technique has opened vast areas of the U.S. to gas drilling. The Marcellus shale deposit runs from New York state across nearly all of Pennsylvania, half of West Virginia and on into Virginia. The Barnett shale virtually surrounds the Dallas-Fort Worth metro area. In all, there could be 100 years worth of shale gas under the lower 48 states.
Due to both the abundance of shale gas and the relative ease with which it can now be extracted, energy companies are looking at replacing coal-fired power plants with natural gas-burning plants. Natural gas emits less than half the carbon dioxide of coal and has the additional benefit of being very easy to start up and shut down.
A gas-fired plant could be sited near a wind or solar farm to generate electricity when the wind is calm and the sky is dark. Ironically, the battle could turn out to be between some environmentalists who favor shale gas development and residents who have complained about the pollution of local aquifers from chemicals in the fracturing fluids.
Replacing coal with natural gas could turn on whether or not the U.S. adopts some cap-and-trade or tax system on carbon dioxide. Without some added incentive to burn gas, the price of gas may not be able to match the price of coal over the long haul. The environmental havoc caused by mountaintop removal mining may also make it more costly to mine coal if the practice is substantially altered or eliminated altogether.
Add to that the power of coal state politicians, which include Illinois, home to President Obama. Natural gas may turn out to be another good idea that couldn’t get traction.
