OUR THOUGHTS ON:

Expanding Markets May Bolster Natural Gas Prices

Energy & Resources

By Jason Droske

The implementation of horizontal drilling and hydraulic fracturing techniques in the Marcellus and Utica Shale plays has resulted in natural gas production that was unthinkable just a decade ago. In a recent Bloomberg News June 7 interview, Fadel Gheit, a senior energy analyst for Oppenheimer & Co. in New York, said, “The Marcellus single handedly changed the gas balance in the U.S. Marcellus shale production is the reason we have low gas prices."

With natural gas prices hovering around $2.50 per million cubic feet (mcf), exploration and production (E&P) companies like Range Resources are moving their capital investments west into the potentially more lucrative “wet” gas and oil plays located in southwestern Pennsylvania and eastern Ohio. Range’s recently released 2012 capital budget of $1.6 billion plans to allocate approximately 75% of the budget towards “wet” gas or liquid areas, with the remaining 25% to be spent on “dry” gas areas.

As a result of the current economics in the shale plays, leasing activities in “dry” gas regions (generally considered to be east of Interstate 79) are decreasing, and leasing activities in the “wet” gas and oil rich regions (generally considered to be west of Interstate 79) are increasing exponentially and are the talk of the industry.

However, this may not mean the end of “dry” gas leasing and drilling activities. It may just be a temporary setback, as other industries gear up to use the abundance of natural gas.

Relatively cheap natural gas prices are contributing to an increased demand for natural gas used in manufacturing and other sectors of the economy. Certain factors could lead to the rapid expansion of two major natural gas markets that may bolster natural gas prices in the long run:

  1. Long-Haul Trucking Operations – The current price for a natural gas gallon equivalent to diesel is $1.70, a significant savings over the $3.91 per gallon diesel prices expected over the next five years. According to a new IHS Cambridge Energy Research Associates report, this fuel price differential will offset the higher initial incremental cost of natural gas vehicles (currently $40,000 - $75,000 more than diesel-fueled trucks) in approximately three years without any government incentives. It is estimated that the trucking industry accounts for 24.6% of transportation-related fuel purchases. Shifting this demand from petroleum would provide significant gains to the natural gas market. The combination of replacing imported oil with cleaner, cheaper, domestic natural gas makes government investment in infrastructure and equipment more likely and was a key point in President Obama’s State of the Union address earlier this year.
  2. Electricity Generation – Increasingly stringent emissions regulations on coal-fired electrical generation coupled with more restrictive regulations facing the coal mining industry will likely lead to a continued uptick in the use of natural gas in electricity production, and that’s before the price differential is considered. Currently, natural gas is over 50% cheaper per million British Thermal Unit (BTU) and is also estimated to be 20% more efficient than coal when producing electricity. Natural gas is expected to increase its market share in this sector during the coming years. 

Although natural gas prices are at historic lows, the combination of increased demand for natural gas energy and potential government investments in these “alternative energy” projects stand to bolster prices in the long run. These developments are encouraging for Pennsylvanians; the massive investments by the E&P companies in Marcellus Shale can be expected to continue, along with the ancillary economic opportunities that go with it.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

 

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