Natural Gas Prices
November 16, 2009
Most days I usually get around to a check of natural gas prices. I am on the email list for Simmons Energy Note written by Bill Herbert, which is well worth checking out, and he carries enough pricing information to get a sense of what is going on. Today's prices for natural gas are in the low to mid $2 range, which is not good. Average strip price for 2010 is $5.24, which is better but not great, at least from a conventional wisdom perspective. Conventional wisdom of natural gas producers, I might add. I suspect that natural gas users have a different conventional wisdom.
As my work life is tightly bound to the capital spending of natural gas producers, I tend to attach a great deal of importance to their conventional wisdom. Conventional wisdom may not be right, but it is the basis of the decisions that get made by our clients.
One of the advantages, as well as disadvantages, of attaining a certain age is that life starts to look like a television series. You start to see the same plot lines repeating. I am not sure whether I am watching Two and Half Men, Desperate Housewives or Dexter. A good case can be made for all three. Actually, if I had to choose, I'd probably go with the Sopranos. But I digress, another symptom of that certain age.
For most of my career, today's natural gas price would have been pretty darn good. The 2010 strip price of $5.24 would have been a fantasy. So why are we in such a depressed mood? Granted, July 2008 was giddy at $13, but we all knew that was not going to last. We got caught up in the party and now we have a hangover. But we need to realize that all of us, producers, service providers, users, need stable pricing.
High commodity prices in natural gas hurt everyone. First of all, we understand that as prices go up, usage goes down. Natural gas is in competition with coal. Natural gas is always at a cost disadvantage to coal as a fuel. Natural gas is only used because of its more environmentally friendly nature and the much lower capital cost of the facilities that use natural gas to generate power. It also helps that those natural gas fired power generation facilities are much more flexible than their coal burning cousins. But as natural gas prices go higher, its use as a fuel to generate power goes down sharply.
Higher natural gas prices also create funding for market disruptive projects such as liquefied natural gas plants (LNG). LNG has high capital costs but low operating costs. LNG plants bring to market stranded natural gas supplies that have little value without the LNG option. What this means is that an LNG facility, once built, will produce natural gas, 24/7/365. No matter what the natural gas sells for. Even in a glutted market, LNG producers will produce. Any cash flow is better than no cash flow, as they must amortize the capital whether they produce or not. Offshore LNG is a huge depressant to the domestic North American natural gas market, but high natural gas prices ensure that they will be built. This doesn’t do folks like me any good. From the standpoint of energy security for the US, I don’t think it does any of us any good.
But just as Tony Soprano rids himself of one disloyal subordinate only to discover another, the commodity markets swing between unsustainable euphoria and black despair. Those of us whose livelihood depends on them are just along for the ride.
Blog Archives
December 2009
My Gosh, I Agree with Ted Turner - 12/22/2009November 2009
Natural Gas Prices - 11/16/2009July 2009
Leadership Near a French Town - 07/16/2009Perversity Strikes Again - 07/10/2009
Of Mice and Windy Men - 07/10/2009
June 2009
Dead Cat Bounce - 06/15/2009Notes From Dubai - 06/15/2009
Value - 06/15/2009
Buffoons or High Priests - 06/15/2009
April 2009
Cold Harbor - 04/10/2009An Arrogant Crow - 04/07/2009