No Black Swans Here: A Texas-Led Gas Rush

The renowned Barnett Shale natural gas field has proven itself a prolific source of energyand tipped off a massive “gas rush” of shale gas exploration. In fact, with the many newgas field discoveries across the country, a glut of sorts has occurred in natural gas,driving down prices. Chief executive Scott Sheffield of Pioneer Natural Resourcesaffirms the Barnett Shale’s impact: “The discovery of the Barnett Shale and itsapplications has really affected the entire natural gas landscape of the U.S. The manyshale play discoveries could totally change the use of natural gas as a major energysource.”

New technologies such as horizontal drilling and 3-D seismic imaging, coupled withhydraulic fracturing (called “fracing”), which stimulates production in wells, has madethe economics of recovery from these “unconventional” gas resources more favorable toproducers. But the added supply of natural gas has driven down prices to a very lowpoint. Sheffield mentions that in the last year prices averaged $4 mcf (thousand cubicfeet) and are now hovering around $5 mcf. Throughout his thirty years of experience inthe industry, natural gas was typically priced in comparison to oil at a ratio of 8:1. As ofmid-November, the price ratio of oil to gas was around 16:1, with oil trading near $80and gas moving toward $5 mcf. With low prices and roughly “100 years of supply foundin the last two to three years,” according to Sheffield, natural gas CEOs were called toaction.

CEOs Unite“Last March with the industry finding an abundance of natural gas, twenty-nine CEOsgot together in a manner of days,” Sheffield recalls. “I’ve never seen so many CEOsgather together so fast.” With such a large supply of gas, demand needs to increase forthe continued recovery of gas reserves to be economical. Sheffield says that bothCongress and the public need to be educated about the benefits of natural gas. “We havea 100-years supply of this energy resource,” he continues. “It emits 50% less carbon thanthat of coal, not to mention that natural gas can reduce our dependency on crude oilimports. The industry also creates roughly 2.8 million jobs a year.” With natural gas apotential game changer in the energy mix, a new trade association, America’s NaturalGas Alliance (ANGA), was formed to help deliver their timely message for America’senergy challenges.

While Congress debates a cap-and-trade bill to reduce greenhouse gas emissions, fullyunderstanding the natural gas opportunity is vital. Natural gas’ role could be furthered asa transportation fuel to replace some of the refined-oil gasoline currently used in vehicles.Toward that end, Pioneer supports Boone Pickens’ plan of converting fleets and morelight-duty vehicles to be natural gas-powered. Pioneer and other ANGA members aretaking steps to convert their fleets to natural gas, with Chesapeake even subsidizing theleasing of Honda Civic’s natural-gas vehicle for employees. They will lead by example,and yes, more natural gas refueling stations will be needed. One state already leads thepack: Utah’s natural gas refueling stations will grow from 25 to 41, owing to a $15

million grant of stimulus monies. The Department of Energy estimates that Utah's grantwill offset 1.1 million gallons of gasoline.

Besides expanding natural gas as a transportation fuel, it has a greater role in powergeneration than currently exists. To compliment the Obama administration’s climatechange agenda, Sheffield suggests that natural gas-fired power could help in replacing25% of the oldest, dirtiest coal-fired power plants in existence; these power plants wouldnever make the cut when emissions reductions come to the fore. The coal industry opinesthat natural gas is a volatile energy source, with prices fluctuating greatly over the last tenyears. “In the past twelve months, there’s been no volatility in gas prices, even with thehurricane in late-2008, which took 40% of production offline,” Sheffield states.“Volatility hasn’t been a problem because of the gas glut. We’re less dependent on Gulfof Mexico production like we were in the past; Gulf gas has decreased from 35% of oursupply needs to just 15%.”

Black Swan of ShaleNatural gas appears to be undergoing a revolution. Early in the year, an energycommentator said that shale gas was the ‘black swan’ of the natural gas sector thatnobody saw coming. It is changing the paradigm, but several industry veterans surmisedits full potential early on. Other countries around the world such as Argentina, Pakistanand Thailand use natural gas as a transport fuel to a greater degree than the gas-rich U.S.does. Major European oil companies are forming joint ventures with U.S. independents(like Chesapeake and EXCO) to learn about our technologies, says Sheffield. He believesthey don’t care so much for our gas, as to learn how to transfer our technologies to use inEastern Europe, Russia, and China, where advances in exploration and recovery methodsare needed.

The next couple of years may be tough for the natural gas industry, according toSheffield. With record inventories and many public companies expressing intentions toadd to their rig counts, Sheffield expects gas prices of about $5 mcf for 2010 and $6 for2011. With Congress floating ideas about removing existing tax incentives in drilling andgiven that independents drill 90% of the natural gas supply in the U.S., substantialpressures on profitability could be at hand. Even at $5-6 prices, firms can make money,but not a lot, says Sheffield. He expects demand to pick up after 2012, when supply,demand, and price are expected to be in better alignment.

Because of recent shale discoveries, thirty-two states now have a stake in the U.S.’snatural gas future. From both economic and environmental perspectives, natural gasshould prove to be the “bridge” energy source that moves the U.S. toward a lower carboneconomy.

Scott Sheffield, chairman and chief executive officer of Pioneer Natural Resources, serves on theMaguire Energy Institute’s board of advisors.

By Jennifer Warren for the Maguire Energy Institute. Prices and interview comments as of mid-November ’09.