Sunday, April 10, 2011

Natural Gas Cheerleaders

Some say shale gas has ruined the chances of an Alaska Gas Pipeline. I'll agree that the flood of cheap shale gas in the lower 48 has been a great set back to the sure thing envisioned by Frank Murkowski back in 2006 (Link to Murkowski op-ed piece in the News-Miner). Murkowski's loss of the Governorship to Palin coincided with the growth of shale gas development. Palin's policy shift from Murkowski's plans was the wrong move at the wrong time. Shale gas development reset the pricing basis for natural gas in North America. The one-two punch of Palin+shale gas was the black swan event that may ultimately prove fatal to the Alaska Gas Pipeline.

Of course the resources and the demand haven't gone away. Businesses will adjust and invest in development projects in places with more favorable conditions. Just listen to ExxonMobil CEO Rex Tillerson gush about doing business in Qatar and the acquisition of shale gas producer XTO:

The producers, like ExxonMobil are in this business for the long haul, they'll continue to meet market demands and manage risk with or without Alaska gas. Closure of facilities like the Kenai LNG export terminal shows that market forces govern the sale of Alaska energy and wishing it otherwise won't help.

So who is optimistic about North American natural gas? The shale gas folks of course. ExxonMobil bought XTO and took the lead in shale gas followed by Chesapeake. ExxonMobil sees a bright future for natural gas and so does Chesapeake (Link to Chesapeake Presentations).

The April 2011 Chesapeake investor presentation explains why they are bullish on natural gas. They see a future with compressed natural gas vehicles (CNG), LNG export from the lower 48, and gas to liquids plants fed by cheap and abundant shale gas. They also envision replacement of coal power plants with natural gas power plants:

I agree with Chesapeake's reasoning and ExxonMobil's optimism for the future of natural gas. The demand is great and they have bought the resources at the low point in the cycle. I think Alaska, as a resource owner, should also be optimistic. The selling price of natural gas will be constrained by production cost and the cost of alternatives. The alternatives: coal, oil, and nuclear all have future cost problems, the end result is long term gas prices in the $6/MMBTU range and sufficient demand for a couple of Arctic pipelines.

No comments: