U.S. Shale Gas: In for More Game Change

2012 kicked off with major developments in the U.S. natural gas sector: huge foreign acquisitions of its shale gas plays and the lowest natural gas prices in a decade.  Within the first week of January, China’s state-run Sinopec acquired a 30-percent stake in Devon Energy’s five shale plays; French oil giant Total planned to invest in Chesapeake Energy’s Utica shale; and a Japanese trading house, Marubeni, acquired a minority interest in the Eagle Ford Shale play.  Racing to take advantage of the shale gas boom in the U.S. and to transfer technological know-how to other countries, these foreign companies and others, which have already entered the market last year, pay a premium price for an acre of shale play in America. 

At the same time, the plummeting natural gas prices in the U.S., due to the glut topped by mild winter thus far, have not stopped the production.  Gas futures dropped 17 cents, closing the day at $2.77 per thousand cubic feet on January 11, 2012, which is the lowest since 2002.  There are concerns that the U.S. will run out of places to store gas.  At the end of the day, the news is good to consumers’ heating bills.  Despite the excess supply, new producers are entering this crowded sector in anticipation that the market will pick up pace, given the popular push for cleaner energy sources. 

At this point, U.S. is ready to export its natural gas and it makes economic sense.  Several companies began looking into building liquefied natural gas (LNG) export terminals, which would be expensive, but the costs could be recouped and, ultimately, create huge profits for the U.S.  Natural gas prices in Asian markets, for example, would be nearly four times more than they are in the U.S.  Some American lawmakers questioned the advantage of exporting U.S. natural gas.  Rep. Ed Markey, D-Mass., asked Energy Secretary Steven Chu to explain the effect of gas exports on prices for consumers and producers, noting that he was “worried that exporting America’s natural gas would reduce the global competitiveness of U.S. businesses, make us more dependent on foreign sources of energy, and slow our transition away from dirtier fuels.”  While U.S. should seek diverse sources of energy, not taking advantage of the gas export opportunity makes no economic sense. 

The more important questions that should be posed to the Energy Secretary are why the U.S. still lacks a cohesive energy policy, what it could be like and when it can emerge.  Rejecting the production of low cost traditional energy sources and pushing for expensive alternative sources with no clear vision on their economies of scale is not a real solution.  The shale gas revolution in the U.S. may be a timely push to a debate on a long-term energy policy.