Is Now a Good Time to Consider Trading in Shale Gas?
At the time, the cost of fuel was rising, and the entire world's population was clamoring for a way to bolster fuel reserves and lower the cost of fuel. This demand prompted companies like Chesapeake Energy to start extracting natural gas from shale rock formations.
For a period of time, the future seemed to be in shale gas. The industry was booming. Some marketing forecasters even believed that shale gas would eventually be the ticket the U.S.A. needed to really compete with the world's top oil producers. That no longer seems likely.
The Current State of Shale Gas
Despite its early promise, shale gas simply isn't performing as well as was originally expected. For the past few years, the industry has been in a slow death spiral.
Since the very beginning, there have been people who strongly opposed shale gas. The biggest cause for concern was the long term damage the extraction methods posed to the environment. Shale gas is extracted using a method called fracking. There were numerous concerns surrounding fracking, including whether it would trigger fault lines, the possibilities of fracking chemicals contaminating groundwater, and infusing the air with even more greenhouse gases. Despite the numerous concerns, efforts to frack for shale gas continued, and Wall Street engaged in trading shale gas stocks.
For a while, things were good. Trading shale gas was both exciting and lucrative. That has ended.
The owners who had invested in shale gas became nervous early in 2019 when Harold Hamm of Continental Resources made an alarming prediction. Based on his observations, he felt that growth in the shale gas industry would decline by approximately 50%. Some investors listened and quickly parted with their shale gas stock. Others sat tight and hoped that in this instance, Hamm was mistaken.
It has become increasingly obvious that Hamm knew what he was talking about. The shale gas industry steadily slowed production. At this point, the future of the shale gas industry in the United States looks grim. Before the pandemic — which has really hurt the shale gas industry — Paul Sankey, an analyst for Mizuho Securities, predicted that at least 70% of the drillers involved in the shale gas industry would file for bankruptcy.
Associated Gas Trade Compared to Shale Gas Trade
Trade in associated gas has steadily increased in recent years. Data posted by the U.S. Energy Information Administration in 2012 indicated that 1/4 of the U.S.'s energy needs were met by natural gas. At the time, shale gas added $250 billion to the annual trade of associated gas.
Between 2006 and 2018, the daily production of associated gas increased as much as 16%. According to the Bureau of Labor Statistics, Ohio, Pennsylvania, and West Virginia were the three major players in the 2016 shale gas industry. They were producing about $12 billion worth of shale gas, which economists believed added up to 0.84% of the three states' economies.
The associated gas industry has not been hit as hard by the COVID-19 pandemic as the oil market, though traders and producers report that there has been a decrease in associated gas use. Data collected by the International Energy Agency revealed that the natural gas market dropped by 4.5% during the first part of 2020.
It will be interesting to see how the combination of COVID-19 and the ever-changing environment will impact the trade of associated gas, particularly shale gas, during the second half of 2020.
Major Shale Gas Businesses Go Under
As the price of crude oil fell, some small shale gas businesses decided to close their doors. In most of these cases, they made that decision due to a lack of funding instead of a lack of interest. At the tail end of 2019, at least six different service companies, as well as nine exploration businesses, had to declare bankruptcy. The collective debt of the fifteen businesses was $13.5 billion.
The Story of Chesapeake Energy
The major movers and shakers in the shale gas industry are feeling the pressure, and some have already bowed out of the game. At the end of June, Chesapeake Energy declared bankruptcy. There was a time when Chesapeake Energy's future was bright. They enjoyed the distinction of being the second leading producer of natural gas in the United States. Buoyed by their success in natural gas, the late CEO invested a considerable sum in shale gas. The gamble failed to pay off.
For some time, there had been rumors that all was not well with Chesapeake Energy. The decreasing prices of fossil fuels made it increasingly harder for the company to stay on top of their debts. Things went from bad to worse when COVID-19 reached the United States. As people sheltered in place, oil prices dropped even lower. Chesapeake Energy couldn't withstand the latest setback. In less than seven months, the once-thriving company's stock prices dropped a staggering 93%. When they filed for bankruptcy, the public discovered that the company chose to not make interest payments on their debts.
Chesapeake Energy isn't the only company impacted by the lack of interest in shale gas.
Other Shale Gas Businesses Are on Rocky Ground, Too
Other businesses are feeling the pinch of low fuel prices, environmental concerns, political pressure, and the pandemic. Dominion Energy suffered a setback when it canceled its Atlantic Coast Pipeline. The purpose was to help transport natural gas from Marcellus Shale. The explanation given for the cancelation was that the program was too expensive and would trigger too many legal hassles for the company to justify the cost.
The New Jersey Natural Gas Southern Reliability Link's license was suspended after the company suffered three different drilling accidents, one of which damaged a nearby home. The company isn't allowed to do any more drilling until it can prove that it's capable of drilling safely. It's unknown if the company plans to make any changes or if they'll just close down the Southern Reliability Link pipeline project.
The Mariner East system started out as a promising Pennsylvania project under the control of Energy Transfer LP. Then they received one fine after another. The fines involved environmental infractions. Based on the size and determination of the environmental groups that keep leveling charges against Energy Transfer LP and similar organizations, it's likely that cost and hassle will cause many companies to decide that shale gas isn't worth the trouble.
Businesses and investors involved in the shale gas industry are paying close attention to the 2020 election. Although he hasn't been quite as vocal about the industry as President Obama was, Joe Biden has made some comments about the industry that gives everyone involved the impression that if he wins the election, he'll pass environmental laws that will make fracking and transporting shale gas considerably more difficult and probably more expensive than it already is.
Will Shale Gas Make a Comeback?
No one has a crystal ball that allows them to see if shale gas will make a comeback. Experts do believe that — even though the situation seems pretty bleak to the businesses who continue to fight to just keep their heads above water as they try to extract and transport shale gas — the industry will make a comeback. This isn't the first time things looked bleak for shale gas. From 2014 through 2016, it looked like the shale gas industry was done. Like now, the price for a barrel of crude oil was low — too low to justify drilling for shale gas. Then the prices of oil rose, and suddenly shale gas was looking better than ever. It was a money-making operation until quite recently.
While the experts usually know what they're talking about, they are also quick to point out that they don't think the comeback will happen quickly. They're also not sure what state the industry will be in when demand for shale gas surges.
When it comes to shale gas, remember that it's a strange industry, and the experts don't always agree. Yes, some experts are enthusiastic about shale gas and the promise it holds for the future. On the other hand, there are several financial market experts who have gone so far as to call shale gas a Ponzi scheme.
The Biggest Hurdles the Shale Gas Industry Faces
There are two huge hurdles the shale gas industry faces if it's going to make a comeback.
1. Crude Oil
The first is the current state of the crude oil industry. The price per barrel has to be higher than the current market rate before shale gas can make a comeback. Prior to the COVID-19 outbreak, some experts felt that an increase in crude oil pricing was inevitable. They didn't anticipate a pandemic that kept people at home. With fewer people driving, the price of crude oil took an unexpected nose dive. Even though many states are opening back up and people are starting to drive again, they aren't driving as far or as often, so gas prices remain low.
Since the contemporary world hasn't really seen anything like the COVID-19 pandemic, it isn't easy to predict how long it will take before the cost of crude oil reaches the point that shale gas makes financial sense.
The other issue is more complicated.
2. The Environment
An increasing number of people genuinely worry about how drilling for shale gas will impact the environment. The group is getting bigger and louder, and people are starting to listen. It's difficult to know exactly what kind of legislation will be passed over the next few years. But it's easy to see that environmentalists who oppose shale gas will continue to object to drilling.
Increased suspicion about the long term dangers of drilling will likely lead to a surge in civil lawsuits. It's possible that the hassle and expense of dealing with the lawsuits — combined with the constant concern about what new laws will be passed that make drilling for shale gas more difficult and expensive — will grind the industry to a halt.
Worried about the present state of the shale gas industry? Are you considering investing in green energy tech? Feel free to contact me, and we'll discuss current energy tech options and why they might be a good choice.