Contemplating the Natural Gas Market: Start with the Fracking Facts

Natural gas prices have been extremely volatile in recent years, moving all over the board. Unfortunately, “all over the board” has essentially meant, “straight down.” This is because of the uncertainty in the market resulting from the ongoing debates over hydraulic fracturing (fracking), the current supply glut, emissions standards, and other factors impacting the market.

Over the next several posts, I’ll explore the pressure points that are key to understanding the volatility of natural gas as a commodity, beginning with the most sensationalized and controversial: fracking.

The noise level over the potential dangers of fracking has been loud and persistent, despite the fact that opponents of this drilling practice have no supportable evidence on which to base their claims. I won’t go into all that here, but if you want to see what the actual research has found, start with the most exhaustive study of the claims versus the facts published in February by the Energy Institute at the University of Texas at Austin: “Fact-Based Regulation for Environmental Protection in Shale Gas Development.” The study included a review of adverse health effects associated with the chemicals most commonly cited as potential pollutants due to fracking. Guess what? Though fracking has been used to drill for oil and gas for more than 50 years, the studies have not found any direct evidence of health impacts associated with fracking chemicals in gas and oil workers or people living near fracking activity.

Regardless, the sad truth is that the facts have done little to quiet the hue and cry over fracking, so it behooves us to look at the potential regulatory fallout of this controversy and how it could impact the natural gas market. It’s hard to overstate the importance of fracking to the natural gas industry—it is, quite simply, the only method that gives us access to US reserves today. There are no more domestic reserves accessible via old fashioned vertical drill methods, and there haven’t been for decades.

So, a big question on my mind when I’m making investment decisions is whether oil companies such as Atlas Energy (NYSE: ATLS), Continental Resources (NYSE: CLR), Chesapeake Energy (NYSE: CHK), Range Resource (NYSE: RRC), Southwestern Energy (NYSE: SWN), Carrizo Oil & Gas (NASDAQ: CRZO) and many others will be able to reach the reserves they’ve already included in their investor reports. Over-regulation to the point that the cost of drilling outweighs the potential profit or an outright moratorium on fracking would wreck havoc on those company projections. This is somewhat similar to what happened recently with the Marcellus shale, when the USGS lowered its natural gas reserve estimates by 60%. In the case of the restated Marcellus estimates, the result was an increase on the commodity price of natural gas. Counterbalanced by the oversupply in the market, the price increase was short-lived, but if US reserves are completely cut off by unreasonable regulation, the supply glut won’t be enough to keep the price down.

The likelihood of increased regulation is uncertain. After the EPA concluded in 2004 that there was no credible evidence of environmental impacts from fracking operations and Congress exempted fracking from federal drinking water regulations in 2005, the issue was re-ignited by Josh Fox’s hyperbolic and inaccurate “Gasland” documentary. Riding the momentum of renewed notoriety and heightened media and public interest, fracking opponents successfully lobbied the EPA to once again study the environmental impacts and numerous bills have since been introduced to increase fracking regulation. Many states have opposed further federal regulation, however, and local municipalities have moved to regulate the practice within their own jurisdictions. Attempts to ban the practice have already been met with constitutional challenges. Most recently, President Obama issued an executive order establishing an inter-agency working group to coordinate the 13 federal agencies studying and considering regulating the natural gas industry.

At the same time, this country is deeply invested – financially, politically, and emotionally – in finding and using cleaner energy alternatives, and natural gas is among the cleanest and most cost-effective. According to the EPA, natural gas produces half as much carbon dioxide as coal when burned for power generation, for example. Nuclear energy meets current standards for carbon emissions, but power generated through nuclear energy is 4 to 5 times more expensive than power generated by natural gas. And, though natural gas-powered vehicles are still in their infancy, I can’t recall ever seeing a market-ready nuclear-powered car. (Okay, Cadillac introduced a really futuristic-looking, sleek beauty at the 2009 Chicago Auto Show, but it didn’t actually have a working reactor. Truly a concept car, it was designed based on the theoretic possibility of using a thorium-fueled reactor. With natural gas-powered vehicles already on the road and in the production line, I think we have to give this green advancement to natural gas.)

Naturally, I’m biased in favor of, and hoping and believing, that a reasonable compromise can be reached that will allow operators to access domestic reserves in a cost-effective manner that meets government standards sufficient to protect the environment and the public. And I think we’ll get to that compromise by remembering to stay focused on the facts and paying attention to the actual standards already in place.

In the meantime, this volatility over fracking regulation will continue to contribute to the volatility of natural gas commodity prices.

Next up: I’ll review the current state of natural gas reserves in the US and discuss a few market factors to keep in mind when considering the future of natural gas.

Chris Faulkner is the Founder, President and CEO of Breitling Oil and Gas, an independent oil and natural gas company based in Irving, Texas. Founded in 2004, Breitling Oil and Gas employs state-of-the-art petroleum and natural gas exploration and extraction technologies for the development of onshore oil and gas projects.