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So if you care about what the (r)evolution in shale gas development means to the economy and have some illusion it is a simple question this is required reading… NYT: Would Exporting the Natural Gas Surplus Help The Economy, or Hurt? On how bad forecasting energy markets can be. Coalguru: Natural gas prices in US to remain low in 2013 How bad is it for coal these days: Coal Loses Crown As King Of Power Generation No time to parse, but some might want to see the latest promo piece (too long to be advertisement… certainly not a documentary so I am not sure what to classify it as) from the MSC folks on all things Natural Gas in Pennsylvania. If I were to parse a bit I would start with the repeated story I heard in there again that shale gas development is creating some new boom in manufacturing employment in Pennsylvania. Maybe in the future, but if someone wants to look at the recent trends in manufacturing employment in either Pennsylvania or even just the Pittsburgh MSA I just don’t see how you can say it yet.. It clearly is usually stated in the present perfect continuous. That certainly is how people are taking it and a repeated conversation I will get into will be with folks who believe manufacturing employment in Pennsylvania is not just up, but up a lot in recent years because of shale gas related developments. Actually if you check the previous links the the manufacturing employment in both Pennsylvania and Pittsburgh took pretty sizable hits just in the September data just out which is a story unto itself and there has not any palpable growth in years. and Good Morning Wiz. Most skip over a lot of the corporate business news, but the machinations within Chesapeake Energy have risen to a certain level of public consciousness of late. Most likely because of the outsize role CHK plays in all things Marcellus. The specifics of the issues at Chesapeake really are in the end pretty classic when it comes to resource booms. Overconfidence and misunderstanding of economics always play a role. For me, and a lot of others the biggest inexplicable factor is why so many people thought you could produce so much more natural gas and somehow invoke ceteris paribus and just blindly believe the price will stay the same. Supply? Demand? Someone took econ 101 out there. Even if Ceteris Paribus is a convenient fallacy in itself there was no rational reason to believe prices would not retreat in the face of a massive new supply coming online. Yet that seemed to be the message. Hold the thought that somehow there would be… still might be someday.. the big transformative shift in demand for Natural Gas in the US… autos using NatGas… new international exports of NatGas.. etc.. etc. I don’t doubt any of that, but I am quite sure the time frame for any of that to happen is a lot longer than companies like Chesapeake were suggesting to their current or potential investors. Let’s talk about those investors. You can summarize the problem just looking back at one of Chesapeake’s quite extensive investor presentations from last year. For context it might be worth noting that the price of front-month natural gas was dropping already and so was CHK’s stock price. The question as it always is for investors is what would the future hold? Here is one page that pretty much encapsulates it all from CHK’s October 2011 investor presentaion. Note first their general prediction of possible prices for natural gas in the future.. Then quote at the bottom is remarkable. They seem to be trying to say that right NOW is the time to really jump in. That the optimal investment point was just past and the public was on the verge of missing the boat so get ought to get in quick (my paraphrasing but if that was not the message what was?). Everyone thinks they can time the market. So in this one slide they are trying to say that for both the short and long term it is the time to buy their stock. A no brainer. You can go and look up how the stock price of CHK has fared since October.  And don’t forget.. we are now well into the period where producers have been cutting back production because prices have dropped so much. As of yesterday it seems to not have dampened the growing oversupply of the market and new price drops. So NatGas has dropped in price back to where it was when the announcements of production cutbacks began.
In the longer term the price suppression may not go away quickly since everyone is saying there is all sorts of new supply shut in by lack of pipelines to get it to market. Mark my words… September, this September for the record… let’s not even think about September 2013, will be interesting in the NatGas markets as supply potentially physically exceeds the capacity to store it in the US.
But to be a bit gratuitous and go back to CHK’s stock price. They really were not shy. From last October still they actually were predicting their stock price was going to triple.In reality the stock has been cut in half since a peak early last August. August may seem like ancient history, but never fear; hubris is eternal. Though they did include a question mark in the slide title.. A bit reluctantly I bet.
  Join the forum discussion on this post - (1) PostsWhy do I have to read in the Ohio media the clearest explanation of how the Marcellus workforce in Western Pennsylvania operates? Likely the paradigm for all of Pennsylvania I would guess. In the Akron Beacon Journal today: Ohio can learn from Texas’ experience with fracking industry, is this sentence:
It turns out that the two week cycle is exactly the same as what is typical for workers sent to rigs in the North Sea. The North Sea mind you is one of the worst places to work in the world. That one sentence also explains what is behind some passenger trends at the airport of course. We won’t even get into the bigger labor force issues that are at issue in that. What I really want to know is why Ohio is not learning from Pennsylvania? I was told my blog here needs more white space. I am not sure this post will be an improvement, but here are some random hits from numbers talked about over the last week and a half. So if I were Allegheny County and I were doing my due diligence defending itself in almost any appeal of a commercial property valuation I would start with this chart which is awfully clear. Since I am pretty sure real estate is a very fixed-cost investment… a roughly 25% decline in vacancy rate has to have a much bigger percentage gain on net profits for almost every office rental in the county. It is a remarkably positive trend no matter. One of my first posts here some years ago mentioned the likely displacement of local bingo hall revenue that will result from the then notional casino. Those stories have begun. Trib: Alle-Kiski area bingo halls feel burned. Speaking of casinos… the Cleveland casino is now slated to open May 14th. When there will also be a casino in Lawrence County I just don’t track enough to know. So you might read this story on the latest from the Pittsburgh pension fund and think things are good: Pittsburgh’s pension fund shows some recovery. Of course if you do the division the numbers work out to the pension fund being up by just under 3%. See the problem? Consider it was a great quarter for the markets and the Dow was up over 12% over the same period. So if my math is right and if you presume this trend continues unabated the pension fund will be fully funded in just over 4 years. That’s great. Of course it also would mean that the Dow would be hitting 70,000 or so at the same time. Hmmm…. Did you know the Pirates are setting attendance records? and h/t to Otis White for pointing out what may be required reading here from MinnPost.com on what some are computing as the “Psychic Benefit” of professional sports. Double Yoi$ obligatory mention of Marcellus Shale.. and following up on the post last week of how the government once tested atomic bombs for fracturing shale for natural gas extraction. I see that the upcoming big shale conference is at the Greenbrier. What is the Greenbrier known for? It was the fallback captial if the US congress needed to evacuate Washington and continue operations even in the event of nuclear war. Dots? On Marcellus is an insightful article from the Towanda Daily Review about how Chesapeake recently sent a letter out explaining they are going to be taking out of royalty payments the costs of getting the gas to market.. and what will really hit the bottom line for some folks is that that they are going to do so retroactively going back more than a year. So when you couple the retroactive amount with the record low price of gas to begin with.. I am thinking some folks are not going to have any royalty payments for some time?? and you gotta love the company’s only non-comment on their letter to land-owners… it says their letter is “self-explanatory”. That PR consultant deserves a bonus. But hey, Chesapeake has some big cash issues.. I guess it is only fair to pass some of those troubles on to the landowners. Moving on…… In a new analysis the Pittsburgh region gets an ‘A’ for the degree of white-Latino residential segregation here. Sort of.. I’m just connecting dots in my head.. but Port Authority transit cuts imminent.. Downtown office vacancy low and declining… big retail like Macy’s Downsizing. It all comes together for me in this story out of Cleveland. and last, but not least… h/t to Bram for pointing out the WashPo’s coverage on the state of cupcakism in the US. Remember it was not long ago that we were so desparate for some ’sign’ of change in Pittsburgh that we obsessed on the metaphor of what the cupcake craze’s arrival in Pittsburgh meant. and yes, it was an obsession. last last… and the best local economic news I read is that someone is at least thinking of saving HEMAP.  My inner energy futures trader is mesmerized by what is happening in the natural gas markets of late. If you do not wake up at night wondering if natural gas will flip from contango to backwardation then I will make it simple.. the price of natural gas is plummeting faster than anyone predicted. A little over 3 years ago, right around when a lot of folks were signing a lot of their Marcellus Shale leases, the benchmark price for natural gas peaked at over $14 per million British thermal units. The benchmark is for the gas at the Henry Hub pricing point. As of Friday that price had dropped to around $2.34. So for now a decline of 80+% from it’s recent peak, but nobody seems to know where the trend ends. Some describe it as a 10 year low in natural gas prices, but that is in nominal prices. Adjusted for inflation I wonder what prices would be described as? I only know what I read, and it seems to me that industry folks, or at least the traders, are beginning to contemplate a near term future where there isn’t enough storage capacity to hold the gas being produced. Then what? Remember the glow of steel mills along the rivers? There may be a new glow forming across the Pennsylvania countryside. But it means more than the potential artificial twilight that may be on the horizon. Most landowners signed leases with upfront hand money as a bonus to entice signing development rights to one of the drillers out there, but also with guarantees of royalties against future production usually around 12.5% as per state law setting the minimum royalty payments, though many may have negotiated higher shares. But not all minimums are a minimum. Some may remember that the drillers won a court case against landowners that the royalty payment was only due on the price NET of a cost to get gas to market. How much that isI do not know, but if there are any folks out there in receipt of royalities it would be of interest (at least to me). The only number in the record I see is from this old blog post which says Range Resources is deducting 72 cents or 80 cents, mer MMBtu, for dry and wet gas respectively. So just for sake of argument, assume the selling price for gas is the benchmark price. Yes, some may be getting more, but hold the thought and lets assume a dry gas example for moment. If you net out 80 cents from the peak and current prices it works out to $13.28 back in 2008 and $1.62 on Friday, it then works out to a royalty decline of over 88%. The bigger question is just where the stability returns to the market. Are current price levels enough. Some industry folks say clearly yes and that profit can be made even as low as $2.50, likely because of the other ‘wet’ products in the gas here. But we are not even at that level right now.  Let me make some introductions. Data meet news, news meet data. I just caught this headline.. but the Patriot News had article over the weekend: Marcellus Shale industry brings ‘tsunami of jobs’ to Pa.. which really was more of an anecdotal story focused on a woman getting a job in the drilling industry here in Pennsylvania. Yet below is what the state’s own data days about women working in Pennsylvania in these industries. I’ve seen virtually no news that really looks into just how one sided this looks. Given the coverage like above, you might think it was a tsunami of jobs for women. Maybe someone wants to go the next step and work out similar gender breakdowns for new hiring in the same industries in say Texas and Oklahoma and see how Pennsylvania compares. New Hires by Gender in Mining, Quarrying, Oil and Gas Extraction Industries
Pennsylvania, 1st Half of 2010
 Source: LEHD, which is a collaboration of state labor agencies and BLS.  First off,though it has nothing to do with what I started writing except that it talked about Bradford County and the international attention Pennsylvania shale gas development is getting. BBC looks at the whole Marcellus thing: How fracking affects a community in Pennsylvania What really got me going was a far less read piece that also looked at some Marcellus impacts. A publication called Area Development has this: Natural Gas Boom Boosting Regional Economies. Iin passing they have a neat little factoid also about Bradford County. It says with clear implication that it is all Marcellus related
Half? I was like.. really? I had to go check. So here is the unemployment rate in Bradford County back a few years:  So it is true that Bradford county had one month, one, where the local unemployment rate hit 9.9%. Problem is that the current unemployment rate is 6.4%, so half is quite a stretch. Skipping that the 9.9% was just one month and that the average unemployment rate in 2009 was 8.3% you really are getting further away from justifying that half claim. The kindest I could is that there was one month in April of 2011 that the county’s unemployment rate was 5.1%. So really cherry picking two specific months I’ve highlighted there with the two recent extremes in the unemployment rate might get you to justifying that half comment. But it raises a bigger question then does it not? Bradford County, the heart of Marcellus, has seen its unemployment rate go up a lot this year? Further, what is the best baseline to really judge the impact on the local labor force up there? One month in 2009, or all of 2009, or some earlier year. The average unemployment rate for 2008 was 5.3%. So yes, the current unemployment rate in Bradford county is up from what was the end of the recession technically. How about 2007? 4.7%. So now go back and think about that half claim. Methinks it all may be a bit more complicated than that.  While shale development is even more in the news than normal…. Here is something worth reading carefully. One of the biggest players in the whole shale gas play to date has been Chesapeake Energy. Everyone should read Chesapeake’s October investor presentation. I spent just enough time on Wall Street to not really take investor presentations all that seriously, or at the very least discount the hyperbole, but lots of info in there and some pretty clear foreshadowing of their intentions. Read page 23 and page 24 first. Then go back and read page 20 on where the oil play is. Once again: go west. Also, it seems the big hope is all about future auto use of natural gas as what will support natural gas prices out into the future. On that the USAToday has a piece on one of the few commerical vehicles you can buy that run on Natural Gas. See: Honda prices new tragically ignored natural-gas Civic. It was for a long time the only natural gas vehicle for retail sale in the US. I don’t know if that is still true at the moment. I was just curious and looked up the official Honda web site for the car. I plugged in some local zips to find a dealer who would either sell or even service a NG vehicle, and it wouldn’t give me one in Pennsylvania at all. The USAToday article says Honda has just now increased its retail availability for these NG cars to 38 states. Is Pennsylvania one of them?  In Pennsylvania, the 5 counties with the largest number of permitted Marcellus Shale pads are Bradford, Tioga, Lycoming, Washington and Susquehanna respectively. Washington County is by far the largest county among the group. It is also part of a larger metro area. So set Washington aside just for a moment and think about the other 4 which are the core of Marcellus Shale development in Pennsylvania to date.. especially in the NE and north central parts of the state. I just added up the employment counts for those 4 counties over the last 5 years and in aggregate this is what you get for the time series:  I must have made a mistake.  |
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