When will the shale gas bloom fade?
It’s been hard lately to get my head around something that just doesn’t seen to make much sense: the ongoing strength of expensive shale gas drilling south of the border in the face of stagnant natural gas prices.
A few years ago, when gas was robustly into the double digits, it was easy to join the dots and derive a clear shale gas picture: slumping conventional supply plus strong demand equals high prices and clear incentive to drill and produce more supply, especially in a robust economy with strong future demand projections.
Then reality hit, the economy tanked and demand – especially from the key industry sectors – evaporated almost overnight. In keeping with traditional economic theory, prices started sliding, from the mid-teens in the summer of 2007 to only US$4 an mmbtu last week.
But still the shale boom continues. Part of the strength can be attributed to lease requirements in the States: if wells aren’t drilled, rights to the land will be lost and someone else will get a kick at the can. That drill it or lose it mentality has driven much of the recent drilling activity, aided by a contango strip of natural gas futures that offered producers the opportunity to hedge undeveloped reserves at fairly attractive prices, in the $6 to $8 per mmbtu range.
That luxury, however, is about to end: current trading on the New York Mercantile Exchange has next winter’s gas prices barely over the $5 a mark, and I fear it won’t be long before producers realize that gas today won’t fetch enough tomorrow to pay yesterday’s drilling bills. That’s when the bottom will fall out.
