The Coming Trouble with Natural Gas
The NYTimes has published two articles in the past two days that address the natural gas industry and the future of US energy relating to gas. Yesterday came Insiders Sound an Alarm Amid Natural Gas Rush. The article looks at industry e-mails and warnings coming from within gas companies that the picture gas co.s have painted and the money they have made might be irresponsible. Like Enron style irresponsible.
A lot of the money provided energy companies rely on forecasting, and energy forecasting is difficult business. The forecasts for nat gas continue to grow, but the product of those wells remains in question. And this problem, far from the glamorous and high-profile issue of fracking, might be the real danger facing the gas industry. The promise of the gas business is that the amount of gas in US shale is enough to provide fuel for electricity, heat and vehicles, for generations, and there is so much that we can have it all at cheap fuel prices all along, because gas is so abundant and easy to procure. That may yet be the case, but it ignores the entire history of energy pricing to assume so. And energy industry folks are right to worry about this level of investment in an unproven industry.
Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”
“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company.”
It all depends on forecasting. A lot of that energy forecasting is done by the Energy Information Agency, the ‘independent’ government info agency, who are front and center in the second Times article, Behind Veneer, Doubt on Future of Natural Gas. Gas forecasts at the EIA have been steadily increasing, a good sign for the industry and its investors. But like any group of officials, not everyone at the EIA agrees with the agency’s forecasts. Said one analyst at EIA: “Am I just totally crazy, or does it seem like everyone and their mothers are endorsing shale gas without getting a really good understanding of the economics at the business level?”
And this I think is the important piece of the natural gas narrative these articles are starting to investigate. The point is not that natural gas will not and can not be a long-term, affordable energy source for the next 60-100 years (depending on the forecast). Rather, that is one option in the realm of possibility, and anyone with an ounce of wisdom should think about the other possibilities: a boom and a bust as the industry sells the energy messiah only to fail to produce, or greater technological advancement fails to increase production as much as is expected and all that gas we know exists cannot be recovered affordably, or environmental degradation resulting from hydraulic fracturing makes shale gas recovery unsustainable.
Whatever the reality about the nation’s use of natural gas, the industry is in its infancy, and it is promising a lot of reward to a lot of people who are providing a lot of money. If nothing else, that alone should cause skepticism. Because too many stories that have started the same way in the past 10 years have ended in tragedy.