Latest News
Pickens' Bullish Natural Gas Call Makes Sense
by Eugene Bukoveczky
Well-known Texas oil tycoon and born-again environmentalist T.Boone Pickens was back in the headlines again. Instead of pitching the benefits of wind energy this time, Pickens' focus has shifted to natural gas. In a new TV ad campaign, Pickens is promoting a plan to cut America's dependence on foreign oil by converting trucks to run on natural gas.
Long-Term Pickens
Pickens' bullish view centers around potential legislation providing incentives for a fuel switch as early as this year. He's predicting that the currently depressed price of natural gas will begin to turn around, but not until 2011. Getting truckers to run their fleets on natural gas makes perfect sense. One analyst has estimated that at current prices, they could cut their fuel costs by 75% if they made the switch.
Substitution and Legislation Create Demand
Promoting new uses for natural gas, primarily through substitution for other fuels, is the best way to boost overall demand at this point. One big potential conversion-based source of demand is the electric power industry. It could be convinced to switch from coal to natural gas by incentives contained in U.S. climate legislation. Natural gas produces 50% less carbon emissions than coal, and the switch could open up a market for an additional 125 billion cubic feet of gas per year.
While last year's House climate bill, Waxman-Markey, failed to provide sufficient incentives to move the power industry off coal and towards natural gas, the surprise Republican Senate win in Massachusetts has raised the odds that a Senate version of the climate bill will include incentives for utilities to shift. Moreover, the upcoming Environmental Protection Agency rule changes expected by the end of March could further discourage coal use - again favoring natural gas.
Supply Glut May Be Overstated
The main problem for bulls is the massive oversupply of natural gas due largely to huge increases in production from unconventional shale plays. Production from these sources has been a Pyrrhic victory for major gas players like Chesapeake Energy (NYSE:CHK), Devon (NYSE:DVN) and XTO (NYSE:XTO) - XTO is now part of Exxon (NYSE:XOM) after being snapped up last month in a $41 billion surprise takeover. The U.S. is now estimated to have 2,000 trillion cubic feet of recoverable gas. Based on current demand levels, this is enough supply for 90 years.
However, a number of so-called "shale skeptics" continue to point out that production rates from shale wells tend to decline drastically. The decline can be as much as 80% in the second year of production from a shale well, meaning the average shale gas well may actually have a lifetime production that is one-third what the industry now assumes. All this suggests that the current supply glut could evaporate in a couple years.
The Bottom Line
There may not be much in the way of gains for natural gas and natural gas shares this year. That said, the combination of higher expected future demand and the potential for a meaningful decline in future shale gas production, could make T. Boone's forecast of higher gas prices a reality in the long-term. (To learn more, see Oil And Gas Industry Primer.)
Back to Latest News