Wednesday, May 16, 2012

Natural Gas Prices

This comment by Tom Mara at the Leucadia annual meeting got me really curious about this guy, Arthur Berman, a petroleum geologist who has done extensive research on shale natural gas.

I think the comment was that shale gas is uneconomical under $7.00/mcf over the longer term implying that when natural gas prices get back up there, Leucadia Energy will do well and make a lot of money.

Here's his blog:

Natural Gas Forward Curve
By the way, Buffett also made a passing comment about natural gas prices in a video interview during the Berkshire Hathaway annual meeting.  It was something to the extent that people are being silly making plans based on $2.00/mcf natural gas prices when the forward curve is telling you that natural gas prices won't stay here forever (of course, BRK via Burlington is being hurt by lower natural gas prices as it reduces coal shipments). 

He said if we change things to adjust to this short term price action, when prices change we may run into problems (or something like that).

(He did say the same thing when crude oil prices crashed to $60 or whatever it was; he said then that the forward curve was showing much higher prices for crude oil so the longer term supply / demand situation was still expected to be tight.)

He understands that the front month contract is influenced by short term supply demand and speculative flow but the longer dated futures contracts may more accurately reflect expected supply and demand over time.

Anyway, the June 2012 contract for natural gas was $2.618/mmBtu but here are the prices for contracts further out:

Jun 2012:   $2.618
Dec 2012:  $3.417
Dec 2013:  $4.026
Dec 2014:  $4.286
Dec 2015:  $4.474

So when people tell you that natural gas prices can double, the market is sort of already expecting that.

Arthur Berman
Anyway, back to Arthur Berman.  This name may not be new to folks who follow energy, but I wasn't really aware of this person and his argument (even though I have been vaguely aware of some controversy with shale gas).

He has done some research (as Leucadia's Tom Mara mentioned) and has published papers.  One that is accessible to non-technicians is posted at his website and you can read it here.

(His website is:

His two main points in the article are:
  • Despite growth in production, not clear if shale gas is commercially viable due to high capital costs
  • Reserves and economics depend on estimated ultimate recoveries and there isn't enough data (history) to prove current assumptions are correct; they may be too optimistic
And this may be a problem (other than to producers) because important policy decisions are being made on "unproven assumptions" about low cost supply.

For example, the "Pickens Plan" would subsidize natural gas for vehicles and natural gas (or LNG) export terminals may lead to long term supply/export agreements at low prices.

He says, "If reserves are less and cost is more than many assume, these could be disastrous decisions".

He says that the big oil companies have been buying into shale and that has become a validation of sorts, but that big oil just bought into it for reserve replacement.  He thinks it's still a big unknown how economic it will be.

Berman contends (on his blog somewhere) that the whole Chesapeake implosion is based on the non-economics of many shale gas wells.    If some of Chesapeake's best wells are unprofitable, what does that say for the rest of the wells?

This is pretty scary stuff.  Again, I think this argument may be old news for energy people, but for people like me, this sort of feels like that lonely guy pounding the table on subprime and declining credit quality before the financial implosion (and all the major banks saying everything is OK).  What if he's right?

Anyway, I don't really have a view on this as I don't have any direct exposure in shale (don't even own Exxon Mobil which bought XTO), but it is certainly interesting.

Obviously, if Berman is right, this would be good for both Leucadia and Loews (that does have conventional natural gas assets).  I think Alleghany's largest equity position is Exxon Mobil so I wonder what they think of all of this.

I normally wouldn't pay attention to this sort of thing (unless I was looking into investing in a shale play) and might have even read this stuff and thought this guy is nuts (who knows better than Exxon Mobil?!).

But after the financial crisis ("no, no, everything is OK"; even the majors make big mistakes sometimes) it might be a good idea to be more open about minority, contrary views, especially when something promises so much (solve our energy problem!). 

And of course,  I wouldn't have even considered reading this stuff if Mara hadn't recommended it.


  1. Very interesting presentation by Mr. Bergman (at (Duke,

    Thank you for posting about him.

    1. That is interesting. Thanks for posting.

  2. Considering that all the gas storage facilities must surely be full. The the cost of carry on the 2013-2015 contracts must be fairly large. So I think the market is not pricing in a double of the price, but rather it is pricing in the large cost of storing the product.

    If the market was expecting the price of nat gas to doulbe by 2015, then the pricae of that contract would be much higher than $4.47

    1. Yes, that is how commoditities are priced. I guess the point is that we shouldn't build our infrastructure based on prices of possibly temporary excess supply at storage facilities. We know these supply/demand situations are never permanent.

      Thanks for posting.

  3. Brooklyn - recently found your blog via mention from Hunter of Distressed Debt and I'm really glad I found it. I think along the same lines but never get to attend LUK shareholder meeting or follow up on ideas like you do. I invest in LUK, GLRE, JEF, etc and so I REALLY appreciate reading your stuff. Please keep up the good work.

  4. Two things stuck out to me, and I'm not a geologist so some of this might be a misunderstanding on my part.

    First he's making a bold claim that the entire country's reserves are overstated by 100% based on the production history of three gas plays. That seems like it would be a very low sample size and not carry much weight.

    The second thing that stuck out to me is he claims that the drop in rig counts are not due to price since most operators are hedged based on 2008 prices. Is it normal for an oil and gas operator to be hedged 4, 5, or 6 years out? Seems like that would be quite expensive to have a risk management strategy that is extended for that period of time.

    A side note: I started reading this site a couple days ago and it's been superb so far, really enjoyed your notes on the Berkshire and Biglari meetings.

  5. The price of natural gas is continually increasing as month goes by. Hope there might be a change happened.

  6. investing on natural gas is the best way nowadays!!

  7. It might be $7 when the study was done, but each year drilling process gets a little faster (cheaper) and the technology gets a little better so more gas is pulled out earlier (higher npv) and over the course of the well life. Perhaps $4 is economically profitable now and could be $3 in 5 years? I think at the margins, companies and govt are moving into using more nat gas but at a deliberate slow pace so that they do not get caught if prices reverse suddenly.

    1. Hi, thanks for the input. I actually don't have an opinion on natural gas at all. But if costs are going down, that's great for everyone, except maybe for some people who need higher prices, lol...

      Thanks for reading.

  8. The ethanol situation is a moving target that bears watching says Shawn Bartholomae, CEO of Prodigy Oil and Gas Company in Irving, Texas. The financial impact on US citizens has not all been good, with the price of corn dramatically driving up the cost of beef, cereals, etc. The battle goes on as engine manufacturers say damage will be done to cars at higher level of ethanol mixed in with gasoline. Now it is even beginning to be a State vs. Federal legal battle. Where will it all end?