Profitability

To make money, drillers tapping Ohio’s shale gas need to get $5 or $6 per thousand-cubic-feet for it at the wellhead [a common way of expressing natural gas pricing].

The current wellhead number is just half that. And the market is at a 10-year low due to oversupply.  Those are ominous signs for landowners hoping for big royalties from gas production and for energy companies with billions in drilling leases that they, for now, can’t exploit.  But Philip Verleger, a former director of the office of domestic energy policy in the Carter Administration says the signs may not be so ominous because of  hedging. “Low price of natural gas will threaten producers that have not been prudent and worked with bankers and hedged their production in the futures market.  But I don’t think there are any imprudent gas drillers out there.  Most sell production three, four, five years in the future, and they’re seeing prices that are down, but still very profitable.”

The boom goes on

Verleger says the long-term viability of Ohio’s Marcellus and Utica production isn’t threatened by most short-term market conditions. 

More than one way

Ron Denhardt is CEO of Strategic Energy & Economic Research.  He says major exploration companies like Chesapeake Energy — the most prominent in Ohio’s shale gas boom — have a variety of ways of keeping things like price drops during  development from getting in the way long term. “What’s happening with Chesapeake is that they’re wheeler dealers. Basically, they’ve  been making money off of land plays. They gobble up all the land.  Then they go find somebody to buy into it.  A lot of foreign companies have done that.  So, some of the smaller players might go out, but the big players can stick with it. “

Price rebound

Both analysts say reasons to forecast a domestic gas price rebound are already visible.

Among them:  Demand for natural gas will jump in the next year as power plants convert  from coal to natural gas -- and will jump more if predictions of an unusually hot summer prove accurate.

Both analysts also say that long term shale gas development in the U.S. will become a kind of self-feeding economic development engine.   Philip Verleger: “For the industrial users of natural gas in the U.S., particularly in the upper Midwest, this is a genuine manna from heaven.”

Advantage U.S.

Verleger says this new, cheap energy source — energy cheaper than anywhere else in the world — will give U.S. businesses a competitive edge globally.  They can expand.  And Verleger expects that will expand related and supporting business.   “You can see it in the increased activity of the steel manufacturers of pipe in Youngstown, Timken expanding.  These are jobs that China can’t take; that Korea can’t take; that Mexico can’t take; because we have low priced energy.”

Not all positives

Chesapeake’s stock prices dropped this week over concerns about its earnings and about a hedge fund its CEO ran. Last week, a survey of oil and gas executives predicted natural gas prices will remain too low through the end of the year for the industry to expand.  And the Wall Street Journal reported this week on growing concerns that the steel industry including Stark County’s Timken Co., may be overbuilding in anticipation of the oil and gas boom.