Sunday, July 08, 2012

Pennsylvania's Fleet in Being

So just to start read the solid overview of all things Marcellus in the Philadelphia Inquirer today: Natural-gas prices force down number of Marcellus drilling rigs

Lots in there, but basically it comes down to this.  They are not making a lot of money, yet they are still drilling and what may be a bigger impact, they have lots of production ready to go online.

So if you think natural gas prices are about to spike?

In naval strategy, or historic naval strategy, there is this concept called the "Fleet in being".  Basically even if your fleet is all bottle up in port, it still can have a stragetic impact.  The metaphor jumps off the page with where the natural gas industry is these days.  The drillers have this huge conundrum.  They want to drill.  In many cases they legally need to drill to keep their leasehold rights. Yet they have effectively drilled themselves into oblivion on the price they recoup in the markets.  Not only the market price overall, but there was for a time this great belief that the city gate prices in the Northeast would provide margins no matter.  Those city gate differentials have collapsed along with the price of natural gas.  Not too long ago Cheasapeake's investor presentations would have slides of what they would earn potentially if natgas prices were literally 4 times what they are today.  Sure must be fun thinking about. I bet they still do muse like that on occassion. 

If there is this growing supply being held back in a way it does not even get reflected in most statistics.......... the article says fully half of the 5,000 marcellus rigs are awaiting completion or shut in just waiting to be turned on.

Anyway.. I said wait until September when some sort of transversality has to happen in the national natural gas storage market... maybe later in September if the heat keeps up. But storage is not a commodity and really a lot of different storage capacities across the country.  It appears the story from Pennsylvania is out and storage is likely to fill up sooner.  Storage actually isn't free and it is question what happens if the price of natural gas falls below what it costs to store?

How about this for a bigger thought experiment.  What if.. just hypothetically...  it is another relatively mild winter later this year as well?  What happens then?  Not something you even see the natgas producers even talking quietly about in public.


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