Shale Gas 2010
The Henry Groppe Award
When, If I get to 80, I hope I have finally figured out that, at that age of all times, that certain predictions are not so much unwise as plain stupid:
Time To Go Long Natural Gas
You've heard it all before: Supply is out-pacing demand... Our ability to horizontally drill for shale gas has made the supply picture seem unlimited... The short-term outlook is bleak...
Those are all fine examples of herd-mentality thinking.
Contrarians like us, on the other hand, keep a close eye on natural gas. Companies like Chesapeake Energy (CHK) have the potential to make you a killing.
And we're not the only ones who think so...
This 80-Year Old Oil Man Thinks So, Too
Henry Groppe, a Texas petroleum analyst with a long track record of betting against the herd, believes natural gas will double by the end of summer 2010.
He's arguing that shale wells are depleting rapidly, and that there is a real shortage of gas "which will become apparent this summer in dramatic fashion," according to The Globe and Mail. "Gas inventories are about to get a lot tighter... new supplies are overstated, and prices are headed north of $8 by the end of summer.”
Why the confidence?
Horizontal drilling advancements are not the Holy Grail they've been cracked up to be, he says. "Not even close. Horizontally-drilled wells face a huge amount of rapid depletion once tapped, and so the supply that we are all counting on to be there is ephemeral at best."
But still... a double by summer's end?
Let's Take a Look at Groppe's Track Record...
According to reports, "In 1980, when oil approached $40 a barrel and forecasters predicted $100 oil was inevitable, Mr. Groppe said crude would fall below $15 by the mid-1980s."
And it did.
"In 1998, when crude dipped to barely above $10 and some prognosticators were hailing a new era of cheap energy, Mr. Groppe said oil was set to soar."
By 2000, oil topped $30.
And just two years ago, when oil threatened to breach $150 and forecasters were calling for $200, Groppe said oil would fall back to the $60 to $70 range in the second half of the year.
Again, he was right.
"Now," he says, "a slow-but-gradual decline in North American natural gas reserves — regardless of shale — means an average price in the $8 range is inevitable to trigger the 'demand destruction' necessary to keep the supply-demand picture in balance... Eventually, that price will creep up toward $10 by the end of the decade, as gas production slowly depletes."
We stand behind Groppe as his past success with market calls proceeds him. There's also Mario Gabelli, another shot-caller in the sector...
Meet Mario Gabelli, who just made a big play on natural gas
Gabelli just bought 800,000 shares of National Fuel Gas — his "cheap way to play America's energy."
"With the economy improving, we think natural gas is undervalued," he says. "America will increasingly depend on gas... "
Let the herd keep hating natural gas... We'll roll in profits by the time they catch on.
In December the HH is still at $4 - and it's been lower. So much for $8. On average, Henry ( nowhere to be found as numerous journalists are trying to discover) and Mario have a great track record. But don't think you can't drown in a stream that on average is three feet deep.
A drunk walking down the road swerving from left to right is on average safely in between the double yellow lines. In reality? Splat.
Be well and be careful and happy new year.
Gazprom: Shale gas is not a myth
In among an interesting story on Gazprom's baby brother Novatek from Russian paper Vedemosti via Novosti comes this aside:
What’s worse, the Russian natural gas monopoly now has to admit that U.S. shale gas is not a myth, and show more consideration toward its European customers, because its European exports will not regain their pre-crisis level in 2010 or 2011, said Denis Borisov, a Bank of Moscow analyst.
Germany’s E.ON, WIEH and Wingas, France’s GdF and Italy’s Eni negotiated adjustments to its long-term contracts, which may inflict losses on the supplier.
Gazprom has been bailed out in 2010 by European prices diverging from the Henry Hub, primarily due to the severe weather at either end of the year. But if weather reverts to the mean, Gazprom is back to where it was. Surging US gas production is not only not going away, it's headed this way. Gazprom and Russia are not as interchangeable as people think and Gazprom is not the world's largest gas company by luck alone. The future is gas, and the future of gas is shale. Combine shale and Russia and the Russian economy can strengthen.
Gazprom could be more efficient than all Western majors and have greater market value, a company source said. However, this will only happen if the gas transport system is operated and financed by a separate entity, and if the gas giant is no longer forced to “voluntarily” sponsor social programs, and Olympic and APEC projects.
I'm not out to get lawsuits by pointing out the half dozen or so European energy think tanks that rationalise Gazprom and are financially supported by them. But those guys need to get with the new instructions from Moscow Central, possibly attached to a goodbye check: Shale is here. And you aint' seen nothing yet.
Gas and Chemicals
Just as the shale story is littered with predictions over costs, depletion and environmental costs that came to nothing, we recently have seen two further unanticipated consequences of the shale gas revolution. One is the emergence of increased oil production, and closely related to that is the resurgence of what was considered a dying industry: The US chemical sector.
Louisiana Economic Development Secretary Stephen Moret says the U.S. has moved from an expensive and volatile natural gas market to one with prices that are much lower and that are expected to stay reasonably low and stable for years—perhaps even decades.
“That is a gift from heaven,” Moret says. “The competitiveness and the outlook for our chemical industry are dramatically better than they were two years ago.”
And unconventional shale plays are a big reason why. Louisiana chemical industry was in real danger of losing facilities, Moret says, as companies were tempted by low-cost feedstocks in the Middle East and Asia. Many facilities have become profitable again, and companies see Louisiana and Texas as logical places to expand.
An international company like BASF not only competes against other corporations, there’s also internal competition over which facility might receive a specific investment. Tom Yura, general manager of BASF’s Geismar plant, says low natural gas prices give the U.S. a significant advantage over Asia and Europe, where heavier, oil-based feedstocks typically are used.
“The stability for us here in Louisiana is good because then you can plan,” he says, adding that the proximity to shale sources nearby also is comforting since transport costs are low.
Chemicals are a key industry. In Europe we need to take advantage of this gift from heaven. But with government policy more likely to increase costs than to reduce them, we are in a greater danger of making life more difficult for the chemical industry.
Another opportunity for Europe squandered? Perhaps not. One of the centres of Europe and the world's chemical industry is in South West Germany and Northern Switzerland. Which just happens to sit on a prospective shale play.
If a city like Basle, Swizerland for example found natural gas underneath or very nearby, the cost of the gas, and the various liquids it contains, would revolutionise the cost base. Given the knock on effect of the chemical industry that could make everyone better off.
The not so good news on Poland is...not so bad.
From Poland news from Polish incumbent PGiNG on what some might think of a disappointment and the shale deniers perhaps as vindication:
Sztubski warns against an excessive optimism. The experimental bore in Markowala(Lubelskie voivodship )and the fracturing of the tight gas deposits by the Halliburton Company has brought lower results than expected. Currently, the hole of the shale gas is drilled in Lubocin, and its effects will be known in the summer of 2011. It seems a lot of time until we know the amount of the shale gas deposits in Poland. The Geological Institute estimated that in Poland may be approximately 150 billion cubic meters of the unconventional gas, Americans believe that it may be even more- from 1.5 to 3 trillion cubic meters.
But Poland is a big place. Lubelskie is over 650 kms from Lebork, home of the Lane Energy/Conoco Phillips well I highlighted recently. For those who need translation that is more than Pittsburgh to New York City or the same as from London to Glasgow.
The sweet spot of shale won't be six hundred kilometers long, but it is more likely to be found in Northern Poland than South Eastern. It may be a disappointment for that part of the world, although note how they aren't giving up either. But some parts of Poland, France, Germany and the UK will be better than others. And some will be really, really good.