The Coming Natural Gas “Crash”

This year I’m thankful… I’m not exposed to gas fracking!  Not literally- by exposure to hydraulic fracturing fluids- and not financially either, vested in petro-speculation.  I had always cast an eye toward fracking, for one simple reason if nothing else: I, along with others, remember the last boom and bust in natural gas.  And while few are alive from the really big boom and bust, the lessons are written for anyone willing to read them.  You know, “due dilligence.”

Good signs of a bubble: sudden growth, with multiple investment opportunities, going down past professional financiers to prosumers and onto “Main Street” (however you define that).  Not so good sign: opacity, as in opaque deals, pricing, and even basic processes and technologies.  That is bad since, without informed deals, prosumers and Main Street (and even some pros) jump in for fear of missing out on a boom, with little time (or possibly even ability) to do their due dilligence.  That is also… present in spades in the situation at hand.

Of course, some people will make out like bandits; there are always some in every bubble.  The better question is who, because everyone thinks it’s going to be them.  It’s obvious they can’t all be, can they?  Of course everyone can’t be- in a turnabout, the success of a few is predicated on them beating out the rest. 

Here’s the deal: a major new technique, hydraulic fracturing, became practical.  Prior to that, nothing quite so significant had hit natural gas for a few decades.  Sure, there were improved exploration methods, including computer modeling, and new extraction, such as deeper offshore rigs.  But these were incremental gains on what had already been there before, so no one blinked.  Just like no one blinked when the previous incremental gain bettered what had been there before that.

Fracking for gas, however, is a serious technological jump.  Serious enough that it split the field into “I’ll believe it when I see it” and “Yee-ha!!!”  (I’ll admit, a decade ago I was in the former camp.)  This splitting then had knock-on effects.  When people finally got wind of real and major money being in play, the whipsawing caused the second-movers, also-rans, and bandwagon-jumpers to jump too quickly.  Again, FOMO- the prospect of a “wave of gas” got people into jumping without due dilligence.

Mind you, this is presuming you’re in a position to do due dilligence in the first place, or even capable of the implied dilligence in this particular field.  Although petro-exploration has kept coming further with every new development (as I mentioned above), it’s hardly just a question of gruntwork now.  Prospecting groups still come up dry a good fraction of the time, and in some cases lose their shirts.  It takes a serious investment to drill even a test hole, and you can only do that so many times before you bankrupt yourself.

And that’s the opacity on the drillers’ side.  On the landowners’ side, the lure of easy fracking money in exchange for signing over your mineral rights is obviously a big temptation- the “Beverly Hillbillies” scenario.  Yet, virtually all landowners are not geologists, let alone practicing, experienced prospectors- the opacity on the part of the landowners.

You would think all this oddsmaking would temper enthusiasm all around.  In most cases, it would, except when literally billions of dollars, and FOMO on billions of dollars, is in play.  Result: a land rush.  This land rush then had knock-on effects, just like previous land rushes.  One contract term, not uncommon in speculative fields, became signed into lots of fracking deals.  Expiration terms have become part of many fracking operations.

Many landowners got frackers to agree to develop and produce within a set timescale, or their drilling leases would expire.  This is understandable; if you own land that isn’t truly out in the wilderness, you generally have multiple options for it.  One of those shouldn’t be “let prospectors park heavy equipment on it, then sit there for years while they figure out what they want to do.”  If nothing else, you’d want the option of booting one set of prospectors that can’t make up their mind, for a different set of prospectors that’s more motivated.  Hence, a “best by” date in the contract.  Land isn’t free, and letting most acreage (with some nonzero value) sit there brings an opportunity cost.

One problem: lots of second-movers and also-rans found that they can’t make up their mind, because the first-movers, not them, got the good land with lots of natural gas.  Yet, they’re obligated to get gas by some date, or forfeit their lease.  In multiple cases, frackers are producing gas at a loss, because forfeiting their land contract would be an even bigger loss.  Sound familiar?

This includes shipping costs.  Gas pipelines aren’t cheap, since methane is a small, light molecule.  That’s inherent to why we use it, as well as why we’re producing it.  A single carbon atom, surrounded by the maximum four hydrogen atoms, is resistant to breakdown by biologic and geologic action; that’s why the gas is still around from the dead plants of millions of years ago.  That single carbon and four hydrogens then burns well, which is why we’ve set up processes that consume it.  However, in between those supply and demand effects must be some delivery processes.  Lightweight gases escape like solids and liquids can’t; methane, as a very small molecule, is extremely good at escaping from things.  Gas equipment and pipelines must then be built to a level that simply doesn’t exist for, say, domestic plumbing.

Domestic plumbing certainly doesn’t stretch into the countryside.  Separate from the quality issue is that many fracking fields are in undeveloped territories, and that again is no accident.  Conventional gas formations, and some shales of interest now, are often in geologically “interesting” areas.  Areas with uplift, folding, and other tectonics; if nothing else, seabed should be driven up, to raise deposits full of dead plankton.  In contrast, the world’s cities and industrial corridors are often in geologically boring areas.  Most cities (and the resulting industrialization) sprang up where commerce was inherent.  Since efficient land vehicles are fairly modern, this meant river barges and sea vessels.  Even better is handling both river traffic and sea traffic, so large cities are often at river mouths or a bit inland.  River mouths and channels destroy rock formations, such as those that often trap liquids and gases like petroleum and methane.

First- and second-movers come into play here, too.  Areas near cities and industry are easier to explore, so prospectors have generally worked them over pretty good.  If any frack-worthy deposits are in or near development, they’ve been snatched up first.  The bandwagon jumpers must then settle for land further afield, with higher operating and shipping costs.

All told, some unlucky or un-dilligent frackers are left with stranded gas.  Either they can’t make the pipelines work out, or a pipeline isn’t profitable with the amount of gas they’re actually yielding.  That depends on the price of gas, which is a moving target.

In at least one sense, fracking is a victim of itself.  All this natural gas is coming into play at once, depressing prices; frackers are finding themselves little fish in a huge pond, and everybody producing at once is like pissing in that pond.  ‘My piss can’t possibly make a difference to all this water, right?’  This is also coming at a time of other technological upheavals, such as all the automation going on.  Automation is happening so fast, jobs are being destroyed faster than new industries can retrain and rehire people.  With a worker churn like this, demand is down.  A gas boom during a general slump means low prices, and low fracking profits.

(I’ll also point out a new generation of heat pumps.  With ground-source heat pumps, buildings can be heated for a fraction of the energy as direct gas burners.  And that energy is mainly electricity, which can be coal, hydro, nuclear, wind, solar, etc., not necessarily gas.  Clearly, the country hasn’t switched over to ground heat pumps wholesale, but it’s yet another straw on the camel’s back.  Yet another: a new generation of wood stoves, plus biomass stoves burning things like corn and cherry pits.)

All told, a bunch of people put a bunch of money into fracking, and they can’t all be winners.  In fact, for some people to be winners directly hurts other players.  Sound familiar?  This is the housing bubble, tying into the financial bubble.  Except now it’s a fracking bubble.

In all fairness, I must say that the fracking bubble is nowhere near the scope and impact of the housing and financial bubbles.  (Hence I put “crash” in quotes in the title.)  Fracking did not reach anywhere near as deep into Main Street investors and consumers; meanwhile, losing some investment money is nowhere near as bad as losing the roof over your head.  The impact of losing your very home has a far greater chilling effect on future spending and investment, which is partly why the recovery is so protracted.

And like the real-estate bubble, we’ve seen it before.  Natural gas had a bubble in the Nineties, which also went bust.  During that bubble, gas was cheap enough to be attractive to drivers, either directly in natural gas vehicles (NGVs), or converted to methanol for a more conventional-looking fuel tank and supply infrastructure.  Somebody do a “where are they now” segment.

Even before that, there was The Big Bubble in Indiana gas.  In the early 20th century, people weren’t really looking for gas too seriously.  Natural gas was still pretty new as an industry, and both pipeline networks and consumer applications were still in progress.  So there wasn’t really a technological breakthrough that led to this bubble; people chanced upon large deposits of natural gas in the southern Great Lakes once they actually got to it.

This led to a boom, and thus a bust.  Factories sprang up that could use gas, like glassworks or other chemical processors.  However, the easy deposits tapped out, like all deposits do eventually.  Some of the easiest gas wells were simply used for pyrotechnic displays!  This included signs illuminated by flaring gas, sometimes even during the day.  That’s a boom for you.  Nowadays, you can find these ex-gas towns in Indiana, though of course a human lifetime has since passed.  Many of the people have moved on, many of the worst scars have redeveloped or simply crumbled back into the scenery.

And I haven’t even touched on the environmental angle.  Fracking fluids have now been found in drinking water, which is a whole ‘nother hairball.  That’s the angle you may have heard about, especially if you follow this blog and ones like it; you probably haven’t heard of well gases and sour gases… yet.

All told, I find fracking to be interesting as a new technology, but hardly a game-changer.  No serious analyst thought the petroleum industry would simply sit back and sunset.  At the same time, there are real issues with exploration, supply, and utilization that won’t make fracking like its contemporary technologies, smartphones and tablets.  More gas is… more gas, for better AND for worse.


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