It’s Energy for Tomorrow.  It’s a green machine, and it will keep the engines of the economy humming fresh and clean.  Clear blue skies, so clear it makes you want to go right up to a bus and suck down exhaust directly because it’s so much cleaner than the air around it.  And it will last forever.  Even if we do start to run short around these parts, we have so much of it here on the Gas Planet that the very idea that there ever wouldn’t be enough of it to do everything we need is…well, it’s out of this world.

And if you like that idea, you might also enjoy some of the other wonderful things we have to offer from Uranus.

The god of the sea says he might have some gas down there too.

So what’s really going on here?  And how can we make sense of the true nature of natural gas?  We can start by taking a look at some of the facts most economists and energy policymakers seem to have missed in their discussions about this highly leveraged commodity on which we seem to be quickly leveraging the future of our entire civilization.

The first thing to keep in mind about the natural gas market is that it is not anything like the oil market: there is no integrated global trading system, and it would be impossible for a single producer or cartel to dominate the global supply.  As a result, most natural gas used in North America does, in fact, come from North America.  This fact is often used as a selling point by proponents of natural gas like T. Boone Pickens, but in fact what it more reflects is the differing physical properties of the fuels and the fact that oil is by far the more convenient when it comes to transportation.  In other words, the resources are not fully substitutable for one another, and shortages of each are likely to cause their own different yet interconnected economic problems.

“Whaaat? I didn’t major in economics!”  It’s OK Boone, neither did I.

There really is no global natural gas supply; the only way to ship the stuff to other continents is in liquefied form (LNG) using enormous and expensive tankers and terminals, infrastructure projects with decade-plus lead times.  For a number of reasons, I believe that LNG will be largely irrelevant to global energy markets except in a few cases wherein the available supply for the foreseeable future is already spoken for by established importers.  The costs, risks, and public opposition to constructing new LNG terminals is substantial and may be insurmountable, particularly in relation to the quantity of overseas gas trade that would be needed to make up for regional shortages as large as those that could occur in a major gas consumer like the United States.  And of course, the process of liquefying and transporting the gas itself consumes significant quantities of energy and, together with leaks throughout the process, goes a long way toward erasing any possible benefit to using gas for the climate.  For these reasons, it is safe to almost completely ignore someone who talks about “global natural gas supply.”  To put it simply, there is no such thing.

So natural gas production is much more of a regional and continental game, and costs of production will therefore differ considerably from one location to another, even within the same continent.  For this reason, it makes little sense to talk about uniform, homogeneous pricing for gas as occurs on commodity exchanges, but there are a number of ways to do so, starting by calculating the breakeven price for production of marginal (new to come online) gas wells.  Breakeven price is really just a way of asking what the wellhead price of natural gas needs to be in order for an exploration and production (E&P) company to make back the money it spends in finding, drilling and constructing, and operating the well, and therefore to justify as marketable any new gas that becomes available.  The first method is to calculate the full amortized cost over time, the second method is to calculate only the operating costs while ignoring everything else, and the third is to ignore the share of the production cost that comes from shareholder investment. 

It should be noted that only the first method actually tells you anything about the sustainable cost of bringing gas to the wellhead and is the only measure that has any real meaning in looking at the overall resource available.  The second and third make no real sense for reasons that should be obvious if you are familiar with the basic principles of full cost accounting, in addition to the fact that every well is considerably different, even within the same gas field or “play” as the industry lingo goes.  Allowing the difference to be made up in equity while failing to report these costs in the wellhead price is the type of practice that allows a commodity bubble to form, although in this case the reported wellhead price is too low rather than too high as in most bubbles.  It remains a bubble nevertheless, with the reported wellhead price lower than the actual full cost and therefore the full costs not being reflected in pricing.  The price of natural gas today does not reflect the actual economic outlook primarily because E&P companies are so highly leveraged under private equity arrangements, especially virtually all shale gas producers.  If you want to get a real sense of the economic effects of one energy source versus another, you need all costs need to be included in the pricing to give an accurate representation of total E&P costs, which means adding in the equity provided by investors.  Once you perform this basic calculation, it becomes immediately obvious that the price of natural gas must considerably increase, at the very least by a factor of two to four, for shale and other unconventional gas sources to make up any kind of substantial share of the total gas market.

Thus, the idea on which we are supposed to be sold, that natural gas will be cheap and abundant for a long time (and therefore also the idea that it outcompetes renewable energy sources) is built on a myth that current, relatively low wellhead prices can be sustained. They cannot.  Most of the proponents of shale gas act as if it is some new resource that was just recently discovered.  It’s not; geologists and oil and gas engineers have known about the gas-bearing properties of certain shales for a long time.  In fact, it was only the gas price hikes of the early 2000′s that caused any interest in shale gas at all, and all gas companies know that the price still needs to increase considerably to make their investments in shale gas profitable.  At this point in time, they are not, and we all know what must eventually happen to a business that can’t generate profits.  What the gas companies are banking on is the idea that we will, believing the myth of cheap gas, fail to build viable alternative energy technology and infrastructure, and that we will end up being forced to pay the true, higher prices of gas once they inevitably rise. 

So it’s time we cut through the cloud here and started basing our projections on physical facts and real costs we already know for certain will come about, rather than on the babbling of people on Wall Street caught up in the day-to-day movement of markets and trained to avoid thinking about anything other than the next quarterly earnings report.

Gas bubbles are, of course, nothing new. 

Additionally, the cost of finding and producing gas is not the only cost involved; the delivered cost of gas to consumers of all types will, of course, be higher than the wellhead price, as it must include amortized pipeline construction and operation costs.  These costs are also more or less certain to increase considerably over the long term, as gas wells close to demand centers are gradually depleted and the average distance that gas must be carried through pipelines increases as more remote sources are exploited, just like with oil.  Bringing gas to hubs and then to various urban demand centers in the U.S. from distant wells in Alaska or Canada is inherently more expensive than piping it from nearby gas fields, while offshore gas pipelines are also more expensive to construct and operate and constitute an increasing share.  Transporting large quantities of gas over long distances also introduces all kinds of new safety, environmental, and national security risks.

So, natural gas might not be the future, and there are a lot of reasons to believe it shouldn’t even be the present anywhere near the extent to which it is.  Still, the idea that a long, comfortable transition to sustainable sources of energy will be made possible by ample supplies of clean, climate-friendly gas is being sold heavily by industry today, and many environmentalists seem to be taking the bait, although skepticism does seem to have increased of late.  But what will happen if the public actually does buy into this idea and agrees to bank the future on going from oil addicts to gas zombies based on “hundred year supply” claims?  What will the world look like, say, 28 years later?  Well, one thing you can count on is that a whole lot more of the Gas Planet will look something like this, times a few hundred, thousand, or million, depending on how each individual well plays out and just how much of the stuff we are capable of burning up before we simply kill ourselves off:

Careful, California: I hear the Texas Chicken Pox is contagious, and it’s spreading like wildfire these days.  Might even turn you into a zombie too.

And of course, don’t look now, but I don’t think Neptune is too thrilled anymore.

Meanwhile, from Siberia to Nigeria to down home in Lou’sana, the fires of industry and the midnight oil kept burning, never once stopping to allow for the possibility that one day soon all of it, every last bit, might come to an end…

Keep on burnin’…