Wednesday, December 30, 2015

The Fracking Gamble

+Gail Tverberg 's theory about the deflationary spiral of oil prices (she thinks we are locked in to a price slide that will bottom out around $20/barrel) also applies to natural gas.  The fact that Chesapeake Energy (the U.S.'s second largest natural gas producer) is headed toward junk status supports this corollary.  A lot of Chesapeake's problem stems from land speculation with the intention of drilling and fracking.  These land deals were conducted with money from bright-eyed investors who never understood the economics of fracking and are now realizing how little real value most of the shale plays held.  Chesapeake's co-founder, Aubrey McClendon, seemed to know when to leave the party, as he departed the company in 2013.

He chose the name for the company out of a liking for the Chesapeake Bay area, despite the company's Oklahoma roots.  From Oklahoma, Chesapeake Energy's gas pipelines grew toward the Chesapeake Bay like a mycelium seeking humid climes to sprout its mushrooms.  After the fracking potential of the Marcellus Shale became known, the company surged further, to Pennsylvania. The pipeline assets were spun off years ago and now belong to Williams.
With the current demise of fracking due to the inability of the market to support the infrastructure and loss of investor interest, many natural gas companies will go under.  The price of natural gas should rise, however, once the markets have sloughed off the non-performing suppliers.  As coal is replaced by natural gas electricity generation, demand for gas should continue to grow.  The long-term damage to prices that Tverberg expects for oil may not apply to natural gas.

While the Chesapeake Bay region may have been the divining rod for Aubrey McClendon's vision of where Chesapeake Energy should go, it is there that he met the greatest opposition over the environmental repercussions of fracking.  Fracking has emboldened the U.S. to rescind laws against oil exporting and to build natural gas export facilities, such as the Cove Point Plant expansion underway a few miles from my home.  Aside from the public outcry against fracking, there are geological limits, climate considerations for which we are now internationally accountable, and the impending economic recession wrought largely by the same commercial ennui that brought about the energy price slump.  Fracking may never come back.  Cove Point may never export any liquefied natural gas.

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