US economy: On the rise

It's a good time to invest in gas services
October 17, 2012

Environmental campaigners have pushed for the retirement of coal plants in the US, securing higher future demand for natural gas

“Of course not! People who want to drill for oil and not use the Hughes bit can always use a pick and shovel.”

Howard Hughes on whether his family’s company had a monopoly on drilling tool bits.

Now the electoral season has nearly ended, the fog of disinformation over the American energy business has begun to lift. Politicians on all sides managed, somehow, to exceed past levels of mendacity about the choices and costs that faced the electorate. For all their differences over climate change, renewable subsidies, or the pace of offshore oil drilling, both the Republicans and the Democrats agreed on one point: the US has a near-infinite supply of natural gas at today’s low prices. Thanks to shale gas, more or less strictly regulated depending on the party in power, the consumer or voter is in line to get something for nothing.

The good news for investors is that this is not exactly true. Yes, there is a lot of gas out there but it is not going to be cheap to produce. To replace production from shale gas wells, which decline faster than conventional wells, let alone to provide the supply increases needed to displace coal-fired generation, will require something close to a doubling of the present US natural gas price. That might cover the total costs of the necessary expansion of exploration and production, which today’s prices do not. It will work well both for the gas producing companies and for the oilfield services and drilling companies they employ.

Even as both parties trumpeted the clean energy miracle of shale gas, the exploration and production companies have been bleeding cash and cutting back on their drilling programmes. There are now about half as many onshore rigs dedicated to drilling for gas in the US as there were a year ago. Delays in completing and connecting new wells have put off a consequent decline in gas production. But that decline is coming fast.

The low natural gas price has made it much easier for environmentalists and regulators to push for the retirement of coal plants. This locks in higher levels of future demand for gas-fired generation.

It’s worth considering the prospects for the service companies who will benefit from a rise in gas prices and gas drilling, such as Baker Hughes International or Halliburton. Mr Hughes would be pleased by what was sold to the voters.