The Oil Drum

Chesapeake also has so-called knockout swap contracts on more than one-third of its 2009 production, and those deals don't obligate the buyers to take gas when prices drop to $6.28 per thousand cubic feet

I am a little puzzled about the "knockout clause." Are the parties on the other side of the hedge totally off the hook if prices fall below $6.28 or do their losses stop at $6.28?

As Rockman has said, someone is (probably) going to make a ton of money buying these natural gas companies at their lows.

I've thought alot about nationalization for two years. In my conversation with the Obama energy team, I concluded that although they were a tad idealistic about the ease of problem solving, and, were also not cold to the idea of extra taxation on energy producers--they were, admirably, well educated in energy policy history and energy policy mistakes, from our past. And did not want to repeat them.

Rather than nationalization, I could see a time when Washington lends money to NG producers to goose production, and uses the occassion to get producers to boost hiring. In return, the government could offer a ladder of buy prices for the extra production of NG, or some structure thereof. I imagine a world where NG prices have fallen below the incremental unit cost--and yet--because the wider macro environment makes NG prices too "high" still, for people, the government comes in and subsidizes the difference.

Grim stuff.

G

One thing that has struck me in the past about natural gas producers is how small any of them are relative to the total. Chesapeake's 2007 annual report shows that it produced 655 billion cubic feet of natural gas last year. Total US consumption was 23,052 billion cubic feet. US produced marketed production was 20,151 billion cubic feet. Using whatever base you like, it seems like Chesapeake is at most 3% of total US production/consumption.

At this size, do you expect that the federal government is going to worry about taking care of them? I can see a Morgan Stanley, or and Exxon Mobil, or a Citibank. Isn't there a chance they will just slip under the Federal Government radar, as one more over-leveraged company, whose president bought too much stock on margin?

Nate said: "I was thinking during the day that the financial types that were shorting Chesapeake and other nat gas companies into the ground (and buying Credit Default Swaps just like they did with Lehman and AIG) would pat themselves on the back for making good coin, then go home to find no heat, plastic bottles or diapers. Yet another juxtaposition of money and energy..."

But...the so-called money is not even real: http://www.financialsense.com/fsu/editorials/deepcaster/2008/0229.html

This could be a symptom of what I'd call the looming 'affordability window' for a transition to lower carbon. One analysis could be in terms of capital availability and another in terms of physical feedback loops ie to create lower carbon energy you have to invest a percentage of current carbon energy.

The problem is that if governments take over they could get the technology choices wrong. Since politicians tend to be lawyers and ex-military types rather than engineers they are prone to spending any spare cash on wars and bailouts rather than cleantech. On natural gas specifically I think the time is ripe for some policy directives ie what are the preferred uses, depletion protocols and strategic minimum stocks taking into account changes in reserves.

US NAT GAS, HAS BEEN AND PRESENTLY IS …………….”DIRT CHEAP”

The diagram above shows the development in US nat gas consumption and the energy price ratio between nat gas and crude oil.

Post winter 2006 the energy price ratio has been in decline and nat gas consumption growing due to growing supplies and relatively cheaper energy from nat gas. The relative stable energy price ratio suggests that oil prices have pulled nat gas prices in both directions. What I believe we are witnessing in the US presently is some substitution taking place from oil to nat gas due to price.

I am (and have been for some time) in the deflationary camp when it comes to oil prices (similarities to the 80’s etc.), suggesting further decline in oil prices and thus nat gas prices.

Question is; will lower economical activity also affect nat gas consumption and thus continue to exert a downward pressure on nat gas prices?

Could this be reinforced by retreating oil prices?

When will supply/demand equilibrium be reached, followed by demand driven price increase and a possible decoupling between oil and nat gas prices?

I expect to see more of this with oil and gas companies in the near future (the Russian majors are already asking for governmental help).

I expect demand (oil and nat gas) to fall faster than supplies (and the liquidity problems will just see to it that the gap does not become too big) in the near future.

This cements Peak Oil.

Thanks for posting this. I need all the informed opinions I can get at this very interesting and distressing time. As little as I know about oil, I know even less about economics, and since we are in the "YOYO"(you're on you're own) phase, I have to make decisions on the best available information, which (of course!) is freely available here.

Aubrey McClendon has been seen on TV advocating the Pickens Plan to use natural gas as a vehicle fuel. I wonder if recent events will change the landscape of our natural gas industry and this plan.

The price of natural gas goes up and oil goes down, relieving the pressure to use natgas for vehicle fuel.  On the other hand, the price advantage of wind over natgas increases.

Looks like going long wind is still a good move, at least until all natgas baseload is shut down.

It's becoming obvious to me that the gov't needs to immediately outright nationalize or at least take command of all major banks and perhaps the key energy companies -- just to ensure that complete and massively lethal freezeup doesn't occur. Credit and energy has to be made to available to the necessary industries just to keep the basics flowing.

Having done that, having bought a little time, there needs to be a rapid program of developing means where basics can be provided, food, cots in armories at the bare minimum, heat, etc. so that mass suffering can be avoided, all around the country. Immediately. Everyone needs to be assured that the basics of life will be there, that there is a net under them -- that survival is not at stake. This and only this can prevent utter mayhem and chaos.

Then begins the serious work of a longer term restructuring so that we can survive comfortably on a radically reduced resource budget.

For a few paltry billions in aid we could have some members of the Cuban gov't come here and show us how to make do with much less, and how to deal with emergencies like this. They stink at supplying iPods and microwaves, but they're very skilful in getting everybody through something like this.

I'm serious about all of the above at the same time that I know it won't happen. Total freezeup, disaster and anarchy will be risked in order to preserve TPTB. And all in the name of restoring 'normalcy', which is gone, never to come back, and resuming growth, which is far less likely than my becoming young again and growing hair.

We need to go into reverse, rapidly in some key areas, but in an organized and inclusive way. Otherwise we're toast.

Even a few days ago it would have seemed mad to write something like this. Maybe not so much now.