Much Ado About Nothing

Jim Brown
 
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The press is full of calls for the U.S. to immediately produce more natural gas so we can export it to Europe and reduce Putin's hold on the European economy. That is never going to happen.

If by some feat of magic the U.S. could suddenly drill another 15,000 gas wells there is no way we could get that gas to Europe in any quantity before the end of the decade.

First, it would take a couple years to drill 15,000 more wells. We currently have 345 active rigs drilling for natural gas. With the average drill time at 21 days, with no downtime, it would take 2 years. We are currently drilling about 6,000 gas wells a year just to keep up with our own demand. We can't just add another 345 rigs to drill 6,000 more wells a year.

Actually, I guess we could but we would quickly run out of rigs, workers, drill pipe, drill bits, frac sand, etc. It would probably take 2-3 years just to ramp up to that level and then another 2-3 years to drill the extra wells. That also assumes we have the drilling locations available to drill.

The entire "drill more so we can export to Europe" argument is just stupid. It shows that the majority of reporters don't have a clue how the oil and gas industry works. We would all love to be able to just pass a law and open a valve on a pipeline and have gas flow to Europe. I would like to win Lotto but that is not going to happen either.

Even if we could magically add thousands of wells we don't have the infrastructure to transport the gas. In America in 2014 we can't even transport enough gas to meet our own demand during the winter. We have to store gas underground from March through November just to have supplies available when the winter weather increases demand significantly.

Our natural gas supplies today are at decade lows with only 1,196 Bcf in storage. If we had four more weeks of severe winter weather those supplies would be exhausted. We can barely provide for our own demand much less Europe.

We hear constantly that we have 200 years of gas supplies thanks to fracking and horizontal drilling. If that is the case why can't we provide enough to cover our own winter demand? Why are gas prices at a 6 year high if we have so much of it?

It is simply a matter of supply, demand and price. We do have a lot of gas in the ground. Unfortunately until the last couple of months it was uneconomical to produce. With gas prices under $3 the producers spend more to drill the wells than they can make from selling the gas. Producers were only drilling the minimum number of wells possible to hold their leases.

We hear constantly about how much shale gas we have. That may be true but all but one shale gas field is already in decline. Only the Marcellus is seeing rising production. The Barnett Shale under Dallas/Fort Worth may have another 5-10 Tcf but it is only economical at gas prices over $4. Producers are not going to drill a $10 million well until they can be assured of continued high prices.

The reserve estimate for the Marcellus was just raised last week to a range of 45-70 Tcf. That is a huge amount of gas. Unfortunately the infrastructure to get that gas to market does not currently exist. Cabot Oil & Gas reported weaker than expected results for Q4 despite a sharp increase in production. The problem was a lack of pipelines to take the gas from the Marcellus and ship it to where it was needed. The prices Cabot received for their gas and oil were declining because of the takeaway problem.

Pipelines are expensive. Pipeline companies don't want to spend billions of dollars on pipelines that are only going to be used for 3-5 years. Shale gas depletes very rapidly and wells have a very short lifespan. Instead of building monster pipelines that may be obsolete before they are even completed they are committing to smaller less expensive pipelines with lower capacity.

Let's assume we could snap our fingers and have 10,000 more wells by year end. There is no way to get that gas out of the country. It takes 5-7 years to build a LNG export terminal and billions of dollars. Cheniere Energy (LNG) has been working on building two monster terminals for the last five years and they are still a couple years away from their first load of LNG. It will be the end of the decade before their facilities are completed. Even if we had the gas available we don't have the ability to export it.

Europe's best chance of getting gas from someplace other than Russia is the Middle East. The major OPEC countries in the Middle East have so much gas they can't even add it all up. Unfortunately they don't have the infrastructure to transport it or export it. LNG facilities are just as expensive and nearly as time consuming as LNG in America. There are numerous facilities under construction around the world but they all have the same problem with construction duration. Most of those have already presold their production to countries in Asia.

Five to ten years from now there will be a lot more gas available for export around the world. Maybe Europe can justify a long term commitment for this LNG and maybe not. LNG is not cheap. It will be far more expensive than the gas they are getting from Russia. LNG gas sells for roughly $15-$18 per Mcf in Asia. Russian gas is about half that cost.

There are no easy solutions to the energy dependency problem in Europe. Russia can blackmail Europe for higher prices at any time and there is nothing Europe or anyone else can do about it. Europe got themselves into this mess by sticking their straws into the Russian pipeline system a long time ago. The Ukraine has 18 pipelines crossing from Russia into Europe.

Europeans thought the Russian democracy initiative that appeared after the cold war meant that Russia was a friend and not a foe. They were wrong. As long as Putin is in control Russia will always be a foe.

I recently ran across an interesting interview with Richard Berman, a geological consultant with 34 years experience in petroleum exploration and production. It concerns shale gas production. This is a very interesting article and a good read. I suggest everyone read it. Shale, the Last Oil and Gas Train

Market

Tensions in the Ukraine are weighing on the markets again today. The S&P futures are down -6 late Sunday. With a weak economic calendar and very few earnings stragglers the Ukraine headlines are going to be the main focus this week. I would like to say investors will probably buy any dip but until tensions begin to cool again I would not count on it.

Jim Brown

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