Bubbles in the Ground: Is Natural Gas Too Cheap and Does Fracking Make Money?

Key Takeaways:

  • Gas companies have sunk large amounts of money into shale gas production
  • Current market prices are too low and will likely rise in the near future
  • Most US Natural gas reserves will not require fracking

I recently came across a blog post by a man named Mark Anthony arguing that natural gas produced is substantially underpriced in the United States, and that the companies producing it are carrying huge debt burdens relative to the value of this gas.

If his data are correct, then the actual cost of natural gas should be significantly higher than it is. He tallies debts of $500 billion from selected natural gas companies and the majors against production of 23 TCF of shale gas. This produces a debt load of $21.32 per million BTUs of shale gas produced so far – much, much higher than a price that has hovered between $3 and $4/MMBtu. Combined with the fact that the number of new wells drilled for fracking has plateaued, this would be terrible news for the companies. In his words:

The shale gas is neither cheap nor abundant…had gas prices been $2/mmBtu or $3/mmBtu higher, the industry would have taken home $46B or $69B more revenue. It would not have made a difference in the industry’s $500B collective debts.

What would you think if the US coal sector had accumulated half a trillion dollars of debts after producing coal for two decades? Patriot Coal went bankrupt for a mere $600M of debts, not $600B. I foresee a looming debt crisis of the NG industry. The debts must be resolved in one of two ways. Either NG prices go to ridiculous high levels and stay there sustainable, so the industry makes enough profits to pay off the debts before the gas runs out. If that does not happen, then many NG producers and banks in the shale business will go belly up.

Since there is such a huge discrepancy between the debt load and the market price, and since he did not source his data, I decided to attempt to reproduce his results myself. His production numbers were from 2011; by 2012 United States shale gas production totaled 32.75 trillion cubic feet, for an approximate revenue at $3.50 per million Btu of $117 billion.

Source: EIA

Source: EIA

So far, this is far below Anthony’s stated debt. But it turns out that his debt numbers were overstated by an average of 100 percent per company, excluding the majors (Exxon, Chevron, and company), which he lumped together.

Debt loads, selected NG companies

Company Mark’s number
(Bn USD)
Actual Debt outstanding
(Bn USD) Source: Capital IQ
CHK

26.69

13.63

APC

34.24

14.76

DVN

20.65

12.15

ECA

17.6

7.73

COP

96.35

25.06

SWN

4.4

1.7

WPX

4.64

1.59

EOG

12.2

6.32

OXY

22.9

7.62

APA

23.06

12.48

UPL

3.39

1.93

QEP

4.13

3.37

COG

2.3

1.13

EQT

5.15

2.51

XCO

2.23

1.33

RRC

3.88

2.94

NFX

5

3.04

NBL

9.53

4.1

PXD

6.04

3.02

MRO

14.22

6.54

XEC

2.51

0.87

SM

2.35

1.53

KWK

2.78

2.11

FST

2.33

1.64

LINE

5.55

6.19

EGN

2.96

1.87

SD

4.6

3.19

WTI

1.3

1.06

UNT

1.33

0.71

MDU

3.78

1.83

SGY

1.5

0.92

HES

21.58

7.38

XOM

13.41

CVX

14.14

DVN

12.15

COP

25.06

BP

46.42

Major Debt (Bn USD)

 128.83

                              111.18
Total (Bn USD)            500.00                                273.43
Debt load to production (2012)              $14.97                               $8.19

Comparing the actual debt figures to 2012 production figures produces $8.19 per million Btu of shale gas, a number both far below his dire claim and far above the actual market price. The price is more in line with the price paid on the world LNG market. This suggests that shale gas might not be the economic windfall that it’s been pushed at. There are a couple other assumptions in this data that bear mentioning, though. This calculation assumes that all of the gas produced in the United States is shale gas. That, of course, is an oversimplification. In 2012, the United States produced 24 trillion cubic feet of natural gas. Roughly forty percent of this came from shale gas. Furthermore, most – if not all – of the companies Anthony lists have holdings in both oil and gas reserves.

This calculation also assumes that all of the debt owed by the major oil and gas companies comes from shale gas production. I can easily think of some other explanations for BP’s debt.

Still, Anthony may have hit upon an important point, and the reason that shale gas drilling has plateaued since the initial book: at current market prices, traditional natural gas reserves are more lucrative. Fracked natural gas will play an important role in the future of American energy markets, but it may not be the shining light that everyone from T. Boone Pickens to this blog has proclaimed it to be. In 2012, the EIA lowered estimate of technically recoverable shale gas reserves to 482 TCF in 2012 from a previous 2011 estimate of 827 TCF. That new number means that shale gas reserves amount to roughly twenty percent of the entire recoverable supply in the United States – far less than you might imagine given the prominence of the hydraulic fracturing debate in the current energy discourse. That debate may be irrelevant for the time being; for now, it’s possible to say “yes” to natural gas without supporting fracking, and at current prices, the market might be doing just that.

In the mean time, it appears that natural gas might be priced too low in the United States, and that the price will rise to the $5-6 range as the true costs of fracking become more apparent. Without a price increase, some companies that have invested heavily in fracking  will have trouble paying down their debts and may be forced into bankruptcy unless they diversify their holdings.

Advertisements

One thought on “Bubbles in the Ground: Is Natural Gas Too Cheap and Does Fracking Make Money?

  1. Pingback: The Key Thing Nobody is Saying About Fracking | Apply Liberally

Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s