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Permalink Reply by Steve on August 16, 2013 at 3:12

So much for any increases in nat gas prices. That is the problem with dry gas - so much available supply that anytime demand rises, a supply increase is as simple as turning on a few more wells. I guess this is good news for the liquid play landowners, like in the TMS, who are waiting for development. All you need for oil prices to rise is a crisis in the Mideast - that is pretty much a guaranteed occurrence. Maybe Encana is watching and this will help them finally decide to pick up the pace in the TMS.

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Permalink Reply by Skip Peel - Mineral Consultant on August 16, 2013 at 3:37

Although the author gives the impression that this is a rather recent development, it is not.  Marcellus gas has been displacing Haynesville gas for some time owing to the difference in transportation costs.  Markets are evolving based on proximity to markets and connection to sales.  Haynesville gas will have an advantage over other producing regions for new industrial demand in the Mississippi River Corridor and the Gulf Coast.  How much that may make up for markets lost to other shale plays is above my pay grade.

The same dynamics are at work for oil and liquids with an added twist.  Midwest refiners have had an advantage for Bakken production which has low transportation costs and no long distance transmission pipelines.  East coast refiners don't have a similarly local shale oil play and therefore have higher transportation costs and little efficient pipeline connections to emerging production.  Much of the refining capacity in the Gulf Coast is designed for heavier crude because prior to the shale revolution the future was importing western hemisphere crude which was not light sweet.  Shale has changed the game in ways that the industry did not foresee.  It will take huge capital investments in infrastructure to get the right product to the right place at an efficient cost.  And that will take years.

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Permalink Reply by Steve on August 16, 2013 at 4:01

Good observations. I also think that LNG sales to foreign markets, where prices are substantially higher, is something that will not have a significant impact on prices for several years. Conversion from coal to natural gas as a fuel supply for industry will take a while as well. Natural gas prices may be stuck at these low rates for the foreseeable future. The natural gas producers can't just cut off supply to increase prices because too many of them need the money to stay afloat. Encana is in that boat - that is why they have been selling so many assets and trying to get into some liquids production. IMO

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Permalink Reply by Skip Peel - Mineral Consultant on August 16, 2013 at 4:10

A lot of companies borrowed too heavily to make aggressive shale acquisitions.  There was a race to lock up what was perceived as limited assets that would place energy companies, especially mid-major energy companies, in superior competitive positions for decades to come.  There were also more than a few CEO egos at work.  The two major ones in Haynesville Shale no longer run those companies.  Reality has made for tough choices and a more uncertain supply/demand future.  Oil and liquids are not immune from these same dynamics although less vulnerable than natural gas.  All the wet shale plays and emerging prospects depend on high crude prices.  A 15 to 20% drop in price caused by increasing production will place them in jeopardy also.

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Permalink Reply by Steve on August 16, 2013 at 4:26

True ,but, World oil demand is still increasing overall at a substantial pace even though the pace of that increase is slowed somewhat when economic recession is in play, when China or India for example have slowing GDP growth oil consumption growth slows but never reverses. The price of oil will not stay down for an extended period because when the cost to produce it exceeds the selling price the supply dries up then World demand is not met, so the cost then rises again. A new benchmark for breakeven has been established and IMO that is around $90, at least for shale oil - without shale the conventional oil being produced will not be able to keep up with demand- so shale costs to produce will have a significant impact on oil prices. I think this is a new dynamic in oil pricing. IMO

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Permalink Reply by Skip Peel - Mineral Consultant on August 16, 2013 at 4:51

World demand goes up ...and goes down.  The economics are different for each play but sub-$80/bbl puts all of them at some risk.  I think the long term wild card is the possibility of shale, oil and gas, on other continents.  That can change market dynamics is significant and unexpected ways.

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Permalink Reply by Skip Peel - Mineral Consultant on August 20, 2013 at 15:23

Light Louisiana Sweet Oil Weakens to Lowest Level Since 2010

Light Louisiana Sweet oil on the spot market weakened to its lowest premium to West Texas Intermediate since October 2010 as tropical weather faded and more light shale oil makes its way to the Gulf Coast. Tropical Storm Erin in the Atlantic Ocean and a low-pressure system in the Gulf of Mexico dissipated over the weekend, reducing fears of a supply disruption. Oil production in Texas’s Eagle Ford shale formation rose 58 percent to 581,923 barrels a day in May from a year earlier, according to preliminary data from the Texas Railroad Commission. “LLS is going to find competition now coming from other areas of U.S.,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “American crudes are all starting to balance out a little bit. As long as imports remain expensive, we’re going to see see more and more ways bring shale oil down to the coasts.”

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Permalink Reply by tc on August 21, 2013 at 3:34

The article could also say the spread between Brent (which LLS substitutes for) & WTI are also at very low levels compared to recent past.  Oil prices are a great study in global & regional supply and demand and currencies and prices.  Look at 3 year charts of Brent, WTI, LLS and Bakken  you can see the regional effects happening under the "headline" oil price.

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Permalink Reply by Skip Peel - Mineral Consultant on August 24, 2013 at 4:55

As the West claws its way out of recession, there remain systemic economic problems with emerging economies.  Particularly the large countries which drive energy demand particularly oil.

Asia's Week: Sudden Exposure to Economic Woe  By Tim Ferguson, Forbes Staff  - forbes.com

What is that Warren Buffett saying, “Only when the tide goes out do you discover who’s been swimming naked”? Well, the monetary tide has really begun to recede from “risk” assets, and that means most emerging markets.  Several of them seemed to be in their birthday suits or close to it this week.

The monetary tide had come in from the U.S. Federal Reserve, foremost among central banks in pushing interest rates close to zero in a politicized attempt to galvanize hiring in America.  When rates are that low, most of that money goes chasing yield or growth, and that has meant the emerging economies. But the Fed looks increasingly ready to start a parlous return to normalcy, and this has the markets racing to get ahead of the policy bend. Hence, the latest rout of equities, debt and currencies in the less-developed jurisdictions.  (Where the sellers are then buying isn’t so clear.)

In Asia, the most acute cases of exposure were in India and Indonesia.  These political economies have much in common, one trait being inertia at the central government level. Both in recent years were blessed with periods of rapid GDP growth during which precious little was done to boost their competitive capacities.  So now that easy credit and “hot money” are beginning to dry up, they are poor draws for sustained investment: Their domestic marketplaces are underdeveloped and prone to corruption and other barriers, while the local currencies are depreciating even as the dollar-denominated debt needs are rising. Absent a sudden new export surge, it’s not clear how the piper is to be paid. Officials of both countries, facing inflationary price rises on top of everything else, are fiddling around the edges with policy responses.

Two years ago, City (London) economist George Magnus published a book, Uprising: Will Emerging Markets Shape or Shake the World Economy? He was mostly concerned with China, and rightly so. Although more hopeful in his briefer treatment of India, he wrote, “In the next 15 years, India will  have to find 375 million jobs for the population now aged 0-14 years, who comprise about 31% of the entire population. Employment creation on this scale would be unprecedented without a major expansion in labor-intensive manufacturing production, and India is advancing only slowly on this front.”  Ever more slowly since, alas.

To various degrees, the story is similar elsewhere in emerging Asia. Even Thailand, which is still drawing plaudits for its peaceful interlude under Yingluck Shinawatra, is now in a recession with a big fat rice subsidy to manage.  When the music stops on an accelerated boom period, the price of assets needs to be written down and this can cause embarrassment for the rich and insolvencies for others.  Domestic interests, particularly those on either end of the finance circuit, try to resist this and governments will stall the reckoning with various extensions and allowances.

If North America and Europe really regain strength and if China can somehow maintain a high GDP growth rate amid its own restructuring, then the pull from imports there can make up for some of the lost financial oomph. But even in that happy event, the emerging nations will need to be selling what others want, and that means resorting their own economies to let “winners” emerge–i.e. quality growth companies. If the losing entities (and subsidies) were not weeded out in prosperous times, they will need to be now, when there is less cushion for those who are made jobless.

It is widely thought, even among skeptics of recent good times, that the great imbalances that led to the 1997-98 financial crisis in Asia are not present now, and that the pain this time will not be as wrenching.  Many corporate balance sheets are in better shape. But the public sectors have not, for the most part, reformed. They still don’t bring in the tax revenue they are geared to spend.  If this sounds much like the U.S. or, say, French situation, the difference is that the American and traditional European economies have enough buying power at home, and enough appealing export properties (including tourism), to keep the wheels turning as the debt wolf is kept at bay.  Can the same be said of emerging Asia? Or is the fruit of the boom mostly fancy new developments again?

Fortunately, the answer is that what happened in emerging Asia’s growth boom was not just financial froth.  Real enterprises grew, and internal Asian trade (both for consumption and as supply-chain participants) has created markets that will not evaporate.  Most of Buffett’s bathers are wearing something, but what is still left showing may not be so pretty to behold as the tides change.

Permalink Reply by 1kw6x71km1v37 on August 24, 2013 at 6:07

Interesting that Aubrey McClendon and his new company are presently buying up working interests in the Marcellus Shale, to the tune of over $13,000 per net acre. Previously, CHK under McClendon had acquired Marcellus leaseholds for around $800/acre. Only two years ago, CHK was selling some of that for $8000/acre and up and McClendon was saying at those prices, CHK doesn't need to drill any wells to make money.

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Permalink Reply by Skip Peel - Mineral Consultant on August 24, 2013 at 6:25

As with the Haynesville Shale the Marcellus Shale has significant variation in petrophysical properties across its basin.  Currently the Haynesville Shale is basically graded as Core (8 to 10+ BCF EUR per well), Tier One (6 to 8 BCF), Tier Two (4 to 6 BCF) and Tier Three (<4 BCF).  At current prices Tier Three and much of Tier Two areas are non-economic.  For that reason the bulk of infill drilling is taking place in Core and Tier One locations.  The market value of the reserves likewise vary by category.  CHK has as many failures as successes in regard to reselling leasehold.  A good example is the 100,000+ acres in Harrison and Panola counties and northern Caddo and Bossier parishes.  It was assembled with little or no available science.  It was simply part of the Haynesville Shale land rush.  With a little over a year left on the 3 year lease terms CHK attempted to unload the acreage.  They couldn't find a willing buyer.  The acreage went to an online auction and never received an acceptable bid.  It was a total write-off. 

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Permalink Reply by Henry on August 24, 2013 at 9:47

Skip,

Is there any map more recent than the old Petrohawk map that shows where these different regions lie?  If so, could you post it, please?

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