A Tummy Tickler

The coming year, 2009, promises to be interesting. More than interesting, I can only compare my feelings to the last few feet of the climb on a roller coaster before it goes over the top to plummet into the interesting part of the ride. There is an ancient Chinese curse simply rendered as, "May you live in interesting times".

My business, my livelihood, depends, to a substantial extent, on money spent by our client companies to develop natural gas supplies in the United States. The direction of that market is up for grabs. There are powerful forces pushing in opposite directions. It is like two freight trains heading toward each other. A crash seems inevitable.

The election of the Obama administration confirms the nation's desire to become green. The fact that the Democrats control the legislature ensures that green legislation will pass with little challenge. This is unbelievably bullish for natural gas. Every green initiative turbocharges natural gas usage as a practical matter.

Yet the very success of the industry in increasing natural gas production over the past few years, along with the oncoming recession and credit crunch, have dropped natural gas prices by close to 50% since July. Idle drilling rigs are lining up in empty lots across the energy producing states. Producing companies that have led the drilling effort have been heavily dependent on easy access to credit, which is no more. The number of natural gas wells being drilled in the United States seems to be coming down hard and fast.

But the natural gas wells that we have drilled in the recent past are different. All wells decline over time. But as an industry, we are used to thinking in terms of 10-20% declines in production per year. Our new wells, in shales and tight sands, decline at 60-70% per year rates. Without large numbers of new wells, natural gas production is going to fall hard and fast.

Yet there is a doubling of LNG production capacity coming onto the world market over the next 18 months. LNG has not been a factor in the US, because Asian markets have taken nearly all of that gas. But now the Asian natural gas market is crashing because of the financial crisis worldwide. A lot of that LNG will now come to the US, because we are the largest market. And because we can pay for it with dollars. In times of crisis, everyone wants a secure currency. And LNG liquefaction plants run 24/7/365, because they have large debt loads to service. Any margin being better than no margin. It is likely that natural gas will flood into the US Gulf Coast and East Coast, as that is where the LNG terminals are.

I am convinced that the natural gas industry is bright. Our culture's desire to be fashionably green and our country's need to have energy security guarantee that. But we look to be heading into a hard dip.

When I was a kid back in the old days, my parents would take us for drives along the country roads. There were places where the car would go over a rise in the road fast enough to give you a little weightless feeling. As kids, we always knew where those places in the road were, and we would always beg our parents to speed up to give us that feeling as the car went over them. We called it a "tummy tickler". I think 2009 is going to be a tummy tickler for the natural gas business.