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The New Gas Wisdom

Unconventional gas sources put a ceiling on future prices.

Fortnightly Magazine - December 2008

safety net, ensuring the U.S. market will have access to adequate gas supplies even as the domestic supply-demand balance tightens. However, LNG imports at recent global prices also provided a very attractively elevated price umbrella for domestic natural gas prices, along with all those assets dependent on gas prices. Going forward, in light of the new outlook on the abundance of domestic U.S. resources, participants in the up- and midstream gas industry will need to learn to invest and operate in a lower price environment. This will have immediate impact on some unconventional producers’ capital plans. In addition, accelerated maturation of operating practices— i.e., industrializing and standardizing production, streamlining basic business processes, etc.—among unconventional players will be critical. Consolidation also seems likely, particularly as capital constraints become more binding throughout the industry given the current global financial environment.

At the same time, quick turn-around for LNG terminals is not likely. This will lead to consolidation as well as deferred and cancelled projects in the near-term. A trend towards vertical integration of LNG assets is a potential strategic move by the majors as they gain the greatest value from the North American market option and have the capital to weather the current market.

As a result, the prospects of several years (at least) of moderate gas prices suggests that gas-fired generation once again may be the most attractive option for mid-merit and base-load power generation, particularly in the light of expensive capital and rapidly-approaching carbon constraints. Conversely, the economics of coal, nuclear and renewable generation all will appear that much less attractive in the future sketched above.

But then again, we all know how dangerous it can be to try to predict gas prices.



1. The term “unconventional” used throughout this article refers to natural gas produced from shale, tight sands, and coal-bed methane geological formations.