Mailbag: Energy: Bear Trader--Ecoserve: Point--Counterpoint

(Ed.note: These comments have been posted for better visibility. They were in post regarding coal gassification.)

ecoserve said...

I have followed the gas industry for years and you are really wrong about one thing and that is the breakbeven point for fracking wells.

Most analysts see a profit potential between $4 and $5.50 for gas from fracking. That is why the DOE Energy Information Administration says we have a century supply as well as project gas well below your prediction in 2035.

Unfortunately, we really do need to determine if the process used to fracture the shale can be environmentally benign or a disaster for drinking water supplies. That is easily shown by the fact that so much gas is still out there and the price in the wionter heating season is still under $6/mmbtu

9:37 AM

Anonymous said...
I believe you have misread my missive. You state "...you are really wrong about one thing and that is the breakbeven (sic) point for fracking wells."

I wrote to the Evansville Observer, "...deep rock hydraulic fracturing technology cannot break even with $5.75 gas; more like $10.00."

You replied, "Most analysts see a profit potential between $4 and $5.50 for gas from fracking."

"Profit potential" means "future possible profits". I was not talking about possible future profits. Fracked wells are selling gas for future delivery at Henry Hub at roughly $6 at this time. $6 is too low a price to attract capital necessary to develop new fields or even drill new wells.

In the intermediate and long term energy is fungible and as the market prices of the various sources drive towards equilibrium. At this time natural gas looks oversold.

For more than a decade (until the 2008 run up to $140 per barrel) oil has been much cheaper than natural gas (by energy content). The reverse is true now. I expect the pendulum to swing back toward neutral, that is, $12/dekatherm gas corresponding to $80/barrel oil. $10 gas (the price I mentioned in my original letter) corresponds to a $3 - $4 margin for the fracked gas producer.

You do agree that at the present sub - $6 Henry delivery price gas fracked wells are not producing a profit "between $4 and $5.50"?

For all you homeowners out there, when I talk about $12/dekatherm gas, I am talking about the extreme wholesale price, the "Henry Hub" price. $12 Henry Hub gas would cost the homeowner about $16 gross, total about $18.50 after taxes, fees, and surcharges, depending on the utility. Henry Hub prices are "take or pay"; you buy in advance and pay in full even if you don't want the stuff. There is a lot of financial risk involved for the utility and the gas pipeline. And, well, duh, the consumer ends up paying the risk premium. Who else?

- Bear Market Trader