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.
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: http://www.theoildrum.com/)
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.