Natural Gas Chaos: Part 2

    I recently did a guest editorial in the Jackson News and Guide, our  fine local paper  in which I commented upon the wisdom of promoting  and subsidizing a NG filling station in Jackson. The paper also quoted me during a phone conversation in a recent follow up which was accurate, as well as from the promoter, Dennis Lamb, John Willott a retired Exxon Senior Vice President, and Keith Phucas of the Wyoming Liberty Group. In the letter I tried to present the economics of NG as a transport fuel  by providing hard concrete data and I did not touch upon other important aspects of NG and energy production such as pollution from emissions and contamination of water supplies, and NG bubble economics etc.  I have covered some of those aspects in this blog in the past. In this post I would like to add some detailed supporting data along with tables and graphs which were not feasible in my  compressed guest editorial.. I will provide references to support my data and conclusions within this post and at the end as well. I caution the reader to be circumspect and skeptical of all presented data whether from me or any other source and to do due diligence before reaching their own conclusion. I would urge the reader to rely on independent assessments and audits which is what I try to do.
       Dennis Lamb was quoted as saying "Anytime you can get an alternative fuel source that has 10% of the toxins emitted for half the price, it's a win-win." I certainly have no idea what this incoherent statement refers to.  Pulling statements out of context is often unfair and discourteous, but I am puzzled nonetheless. What toxins is he referring to? Half of what price and where?  The two nearest CNG stations to Jackson are in Riverton and Rock springs and the current price is $1.96  and $1.61
respectively. I am under the impression that these prices do not include fuel tax. Prices in the nearest metro areas of  and Denver  range  from $2.33 to $2.80  and appear to be just ove $1.30/ gal in Salt Lake. The  10% toxins part of Lamb's comment if that is indeed what he said, is mystifying.  Promoters of NG like to state that NG is the cleanest fuel of the big three but that is misleading. It is true that there is somewhat less CO2 emitted per BTU of NG when burned at the source.. Here is a link to a  graph of emissions of the three energy fuels and their relative emissions over a 20 year period. The graph shows that shale gas emissions exceed emissions from diesel, oil,  and coal.  Another important fact to remember is that methane is 105 times more powerful than CO2 as a greenhouse gas. Hence the worries about the methane hydrates in Siberia which could be released by Global Warming. All fossil fuels contribute to global warming and NG is no less a culprit than coal or oil if you believe this power point presentation. I fail to see  the win-win situation as promoted by Lamb. Looks like  win-win if Lamb obtains free taxpayer funds and lose-lose for the rest of us. Which brings up the point of subsidies. How much subsidy did Bob Shervin receive when he built his Sinclair station just up the street from where Lamb wants to site his? I haven't talked with Shervin but if the taxpayer is going to subsidize Lamb, then I think Shervin and the other station owners deserve the same subsidy, even if it has to be given after the fact.
     I would now turn to the supply side of the argument in more detail which I briefly covered in my earlier post. Willott seemed to agree with me when I said there was a 11 to 23 year supply of NG and then  he added that "some would say it's more than 150 years of supply." There is no one credible who is saying any such thing. John flipped from reserves which are  economically recoverable  to resources which are not at current historical prices. In fairness to John, the NG resource base world wide is probably huge especially from Alaska and Canada through Siberia not to mention worldwide deep water gas resources. Nobody has surveyed Antarctica which almost certainly has a resource. But again:think Reserves not Resources! Could these enormous resources be tapped as John says? Of course they could, but they are not affordable. It's the same for coal resources. They are huge but the reserves of affordable coal are not. There of course is no concrete number of affordability of an energy resource but at least in the case of oil, when the per barrel cost gets much above $100, the world economy gets cranky. The at times  deceptive statements from the energy promoters almost always ignore the concept of net energy. If a resource is so deep or so distant that it takes as much energy to mine it as the energy you get out of it, then it is for all intents and purposes a resource that will never be tapped. This is the fraud of the   Green River Oil shale formation in Wyoming, Utah and Colorado. It is not  even oil, but waxy kerogen locked in rock and if it were recoverable as oil it would be  the largest  fossil energy source in the world. But remember: Economically recoverable and net energy recoverable. It is not now economic and never has been. Remember: It takes energy to get energy.                                              Let's return to gas.The next graph is a  credible estimate of how much gas we have. It is from 2011, I believe and will soon be updated. It was prepared by the the Potential Gas Committee(PGC), a quasi  independent group representing the industry. The numbers are in trillion cubic feet:

The key numbers to look at are the Proved Reserves and the Optimistic reserves. There are 11 years of proved take it to the bank gas you can count on and optimistically(whatever that means) another 11 years. this is at current consumption. I will caution the reader that these numbers jump up and down as gas moves from resource to reserve category and back, but I think it suffices for planning purposes for individuals and governments. You also see probable resources, some of which could be developed at the right price.That is a key point to remember. Very little of that category will come out of the ground at $2 or $3.  I will reiterate, the US IS NOT ENERGY SUFFICIENT in NG now and hasn't been for ages, and if companies like Cheniere  which is completing its liquefaction facility in Sabine Pass LA have their way, the US could be exporting $3 US gas to a world which is paying in the mid $teens. BC plans to build a similar facility at Prince Rupert for Asian export. Once this trapped gas has a chance to escape to world markets to trade like oil and coal, I'll give you 3 guesses what will happen to NG prices. If you are an oil and gas producer in trouble  like Chesapeake, it can't come too soon. That's why I find it peculiar that John Willott thinks gas prices will stay low. Now lets take a detailed look at gas production in a few selected states and nationwide. I will show Wyoming's numbers  along with the total US production:

 Please note that this includes conventional and frac production, The bottom graph can be enlarged to tease out the various large producing states. You will note that production in all states with the exception of LA are flat to declining given the low NG prices. But I concede if gas were to recover to say $13 which it was a few years back, you would likely see these graphs turn up.
    I also must again state that if gas  were to stay this low as John expects, I can guarantee bankruptcies or buyouts in the gas sector. John's boss, Rex Tillerson was asked in testimony before the Council of Foreign Relations last June 27 how Exxon was coping with the low NG prices. Here is an excerpt from his testimony as reported in the Wall Street Journal:

By JERRY A. DICOLO And TOM FOWLER

NEW YORK—-Even energy titan Exxon Mobil Corp. is showing signs of strain from low natural-gas prices.
On Wednesday Exxon Chief Executive Rex Tillerson broke from the previous company line that it wasn't being hurt by natural gas prices, admitting that the Irving, Texas-based firm is among those hurting from the price slump.
"We are all losing our shirts today." Mr. Tillerson said in a talk before the Council on Foreign Relations in New York. "We're making no money. It's all in the red."
His comments mark a departure from remarks made earlier this year on how lower natural-gas prices hadn't yet hurt the company because of its operational efficiency and low production costs.
      It should be noted that Exxon/XTO is the biggest NG player and wants to get its gas into LNG ships where the real money is, ASAP .  The idea that the US should keep its gas at home to keep US energy prices low and promote jobs in the  domestic Fertilizer and petrochemical  industries apparently hasn't crossed Rex's mind. Rex like all corporate titans cares only about Exxon's bottom line and making money for EXXON and the shareholders and if he get's his LNG export terminals, he will be making money in spades.
     Now let's take a look at how these low NG prices are killing the producers. Art Berman, an independent analyst in a recent paper noted that $22 Billion/qtr is needed to maintain domestic NG supply. Cash flow of the 34 largest producers is only $12 billion a quarter which of course leaves a deficit of $10 Billion/qtr!
With losses of this magnitude there is no such thing as retained earnings and so companies like Chesapeake and others have been selling off assets and seeking joint ventures or assuming more debt to keep the party going. Berman's source was the highly respected Calgary based Energy Player, ARC Financial . Here is their graph:

I leave it to the reader to draw his own conclusions on the feasibility, affordability and future of NG as a transport fuel. It certainly can be done and is being done and if individuals and investor groups want to proceed, I say more power to them. As a libertarian, I am opposed to taxpayer subsidies for them because it benefits one group and harms others. Based upon my research, I would say that there would be no benefit to switching from oil to NG for transport here in Jackson.
As a disclaimer I have  both short and long financial positions in many  North American energy producers and pipelines including Exxon. I have no intention of converting my car or truck to CNG.

References:
http://www.eeb.cornell.edu/howarth/Marcellus.html
 http://www.resilience.org/stories/2013-01-11/shale-gas-how-clean-is-it
 http://online.wsj.com/article/SB10001424052702303561504577492501026260464.html
 http://www.slate.com/articles/health_and_science/future_tense/2011/12/is_there_really_100_years_worth_of_natural_gas_beneath_the_united_states_.html
 http://www.albertaoilmagazine.com/2012/02/is-the-eias-new-shale-gas-estimates-off-base/

Andreoli, D., 2011, The Bakken Boom - A Modern-Day Gold Rush. The Oil Drum: http://www.theoildrum.com/node/8697.
Berman, A.E. and L. Pittinger, 2011, U.S. Shale Gas: Less Abundance, Higher Cost. The Oil Drum: http://www.theoildrum.com/node/8212.
EIA Annual Energy Outlook 2011 Early Release Overview.
EIA Annual Energy Outlook 2011 Natural Gas Tables: http://www.eia.gov/oiaf/aeo/tablebrowser/#release=EARLY2012&subject=0-EA....
Gilbert, D. and R. Dezember, Chesapeake Energy Pulls Back Amid Natural-Gas Glut: Wall Street Journal, January 24, 2011: http://online.wsj.com/article/SB1000142405297020380650457717865173251197....
Potential Gas Committee 2010 Report: http://www.potentialgas.org/.
 http://www.theoildrum.com/node/9751
 http://www.theoildrum.com/node/9753
And of course my previous blogs on the same and related subjects.
Hugh Owens MD Jackson Hole 2013