Does the U.S. Have Too Much Natural Gas Again? Maybe
Posted Thursday, September 11, 2008 ; 06:00 AM

Whether more American energy is imported or more domestic energy used instead of that from Venezuela or Iran, U.S. trade deficits would shrink and the dollar would strengthen.
Story By Rob Cornelius

Just in time for the political ad season, the T. Boone Pickens ad buy on national TV is picking up steam. The PickensPlan.com ads are the ones with the gruff Oklahoma State fan and oil billionaire giving us his plan on how to ensure energy freedom for America.

This could just be about energy, or it could turn into an endorsement for a presidential ticket at the end of this fall. Who knows? But Pickens and other big natural gas backers like Chesapeake Energy CEO Aubrey McClendon have a history in swift boat construction. Plus they already have spent close to $4 million this election cycle in California trying to pass a $5 billion ballot bond proposition that would support the use of natural gas as a transportation fuel.

Pickens wants to change how America uses energy and probably can make a few bucks doing it. McClendon needs to find something to do with all this new natural gas his company finds. Frankly, there's almost too much of it in the short term.

Most of the recent shale natural gas finds are highly pressured and short duration.

That means that once you drill and fracture the wells, you get lots of gas, and you get it quickly, peaking in a few short years. The newest discovery in the Haynesville Shale of Louisiana and east Texas is flowing out of the ground faster than there is infrastructure to take it to market.

Even with a pretty hot summer, and industrial use stable owing to lower prices, injections of gas for the heating season this winter are ahead of most expectations. Natural gas prices are down, less than $8 per thousand cubic feet. That should mean that your heating bill will be no more scary than last year's and maybe less so.

But with the price of gas dropping from $13 per MCF to less than $8 in roughly two months, the market has changed.

A lot of wells that were started this spring at higher prices may not be nearly as profitable. Chesapeake is pretty immune to much of this, with some of the lowest finding costs in the industry and the bulk of their 2009 natural gas production already hedged at $9 or higher.

All that said, there's too much gas again. Like in 2006, where the market dropped back to the $6 range, and drills and crews across North America went from fully employed to doing crosswords in a hurry. It could happen temporarily in the Marcellus Shale until the demand curve shifts.

We will talk more this fall about putting natural gas in cars and why it makes sense. Maybe someone will find me a CNG-powered Honda Civic to take on the skid pad. Right now, not counting for storage costs, CNG is down to about $1 per gallon of gasoline equivalent. I bet a lot of folks would gladly spend a few grand on infrastructure or converting their current car to natural gas to pay a buck a gallon.

If America can't make the move to natural gas for cars, the methane will just go someplace else. McClendon spoke last month about finding ways to make natural gas truly a world market. And if that happens, the natural gas price advantage for the American consumer might be dead. Natural gas is worth twice as much in Japan or Europe as it is here.

"We will look at investing in LNG (liquefied natural gas) export facilities, and we are studying that right now," said McClendon in an Aug. 1 call with analysts.

"We've got to figure out a way to get some linkage to the world market... . I can't talk too much about it other than to tell you that we read the papers and see that gas around the world goes for twice what it goes for here (in North America).

"And so my view is that we make a great widget here, and that widget is valued at X here and 2X around the world. So I am trying to find a way to get it on a boat and get it to some overseas markets as well."

(I recommend a look at the McClendon/Pickens Web site: .)