Shale Gas Maintains Appeal, but Maybe Not in New York
The State Journal - 14 January 2010
Rob Cornelius discusses gas prices and the purchase of XTO Energy by
Exxon.
I guess the Exxon put is under the natural gas market. It looked that
way a few weeks ago after the world's biggest oil company bought
natural gas driller XTO Energy in an all-stock deal.
Exxon has tons of cash, a great currency in its stock and seemingly no
clue how to add energy to its reserves via the drill bit. So it buys
wildcatters like XTO, which holds substantial acreage in the Marcellus
Shale in our region.
This was a victory for what they term "unconventional" shale gas, which
is the stuff a couple miles or more under big swaths of West Virginia,
Louisiana, Arkansas and Texas. But once big guys like Exxon have seen
that virtually all the new production on the continent comes from these
deep, expensive and quickly depleting well, they've finally ponied up
the dollars to be there.
Exxon needs to add barrels of energy (BOE) to the bottom line every
year just to maintain reserves, and buying gas in the ground is a far
cheaper call per BTU than trying to buy oil. This deal has the giant
paying around $3 per thousand cubic feet (MCF) for the proved gas
within XTO.
This number is in the same ballpark as what French oil major Total paid
Chesapeake Energy recently for a chunk of that company's reserves and
future production in the Texas Barnett Shale.
Trouble is, going forward, there's not a ton of upside apparently built
into NG. Chesapeake has opted to use this low point in price to finance
its drilling for a few years. Its recent deals and placements of future
production and drilling costs total almost $11 billion. A recent
Reuters report cited concerns about a double-dip of natural gas prices
in North America.
Today, gas prices sit around $5.50/MCF on our exchanges. That's not a
big jump from the $3 paid for XTO per MCF by Exxon.
Without a bunch more industrial use or a meaningful start toward using
NG as a transportation fuel, it's hard to see where demand is going to
come from to get market prices over $8.
The last time one of these huge deals came down the pike domestically
was when Conoco Phillips bought NG driller Burlington Resources at the
end of 2005. Retail price for the latter was also just over $3/MCF. Gas
was all the rage in 2005-08 as we ratcheted prices up twice into the
teens.
But since, we've seen gas down in the low $2 range. And folks who can
remember back four years see the Burlington deal as the top of the
market. Maybe the Exxon/XTO deal will get the same pub.
Then again, if the natural gas guys can't do a good enough job
explaining how a Marcellus well is thousands of feet below the water
table and sealed from drinking water, this all is moot. New York is
turning into The Wilderness Campaign for energy producers.
Between attacks on private property by the Year Zero crowd and
politicians who want more severance taxes, the Empire State is turning
into a quagmire for drillers.
Worse still, this sort of foolishness could actually upset the
Exxon/XTO deal, which has an out for the former company if drilling via
hydraulic fracture becomes illegal or economically unviable through
regulation.
Rob Cornelius of Parkersburg writes a column for The State Journal. His
e-mail address is robcwv@gmail.com.