Could Shale Gas Reignite the U.S. Economy?
November 03, 2011 - Unlocking vast reserves of shale gas could solve the energy crisis, the job crisis and the deficit. Now, about fracking's safety...
In late 1998, Chesapeake Energy (CHK), an independent natural gas producer based in Oklahoma City, exemplified an industry in decline. The company's stock price had fallen over two years from above $34 a share to 75¢. Its market value tumbled 93 percent to $72 million. (...) When Aubrey K. McClendon, Chesapeake's chief executive officer and co-founder, announced he might sell the company, there was little interest. (...) Good thing he didn't sell. Thirteen years later, Cheaspeake's market value exceeds $18 billion. Its shares sell for about $28, up 8 percent this year. (Businessweek)
Background and ImplicationsChanges to the North American natural gas market are affecting many industries, including energy, chemical, plastics, steel, and fertilizer. Improvements in horizontal drilling and hydraulic fracturing (fracking) have enabled companies to tap into shale basins and recover natural gas more cheaply, especially relative to oil. Historically, one barrel of oil has traded at between six and ten times more than one mmbtu of natural gas. Since 2009, this ratio has increased to between fifteen and twenty-five to one. Buyers are evaluating material selection, pricing formulas, supplier footprint, hedging, and long-term contracts.
Prior to the technology improvements, shale gas supplied 1% of US natural gas. In 2010 it supplied 23%. The Energy Information Administration predicts that natural gas will continue to supply around a quarter of the United States' growing energy needs, with oil declining and renewable increasing slightly. Additionally, net imports of natural gas are set to decline: ports initially built to import liquefied natural gas (LNG) from Gulf States are being retrofitted for export.
In chemical, producers that use natural gas as the feedstock for cracking ethylene will have a cost advantage as long as natural gas is at least seven times cheaper than oil. New plants are being built to take advantage of this. The growing bias towards natural-gas-based crackers will have a effects on ancillary products such propylene, butadiene, and benzene. Oil-based cracking produces these in greater quantities than natural gas. This is leading to scarcity and interest in "on-purpose" reactors, especially for propylene.
The steel value chain is also being impacted, as directed reduced iron (DRI) is becoming a more economical substitute for scrap steel. Nucor is investing in a 5.5 m ton facility in Louisiana and has secured a 20-year supply contract for natural gas. These will reduce Nucor's exposure to the volatile scrap market US Steel and Essar are reportedly considering similar investments in Minnesota.
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Previous Cost & Capital News:
U.S. gas glut fuels chemical plant building boom: Not too long ago, chemical industry insiders would joke about when the next U.S. chemical plant would be built. The answer, the punch line always went, was never. That has radically changed in the past year as cheap U.S. natural gas prices have given America's chemical industry a large cost advantage over European rivals, many of whom make chemicals from crude oil..."The whole shale gas play has the potential to change things," Peter Oosterveer, Fluor's president of energy and chemicals, said at the Reuters Summit. "It's a really interesting development." (Reuters. June 16, 2011)
Insiders Sound an Alarm Amid a Natural Gas Rush: Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States. But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells. (New York Times. June 25, 2011)
Responses to the NYT Series on Natural Gas: Rounding-up the best and most colorful comments in response to NYT’s latest hit piece on natural gas. (Energy in Depth. June 28, 2011)
America Needs the Shale Revolution: The drilling boom is the best U.S. energy news in generations and is crucial for reviving domestic manufacturing (WSJ. June 13, 2011)