Thursday, October 7, 2010

The Ugly Truth About The Economics Of Gas Drilling

It doesn't look pretty. It appears the gas drilling industry is being forced to sell future production at a lower cost than the current low cost of natural gas production just to stay afloat. Chesapeake, the second largest producer of natural gas just sold future Barnett Shale production to an affiliate of British Bank Barclays.

raising money to fund drilling and cut debt

Click here to see the Industrial Fuels and Power article about the future production.

How many companies will survive?

What about those like Titan Operating that depend on Venture Capital to run their company?

Remember the
Internet Bubble and Private Equity Crash 2000 to 2003? Could this happen again with the natural gas industry? The selling of future production at very low prices can't be a good sign for the gas drilling company or those that are funding it.

March 2000 shook virtually the entire venture capital industry as valuations for start up technology companies collapsed. The values of the fund's investments were below the amount of capital invested

Definition of Venture Capital:

To put it simply, an investment firm will give money to a growing company. The growing company will then use this money to advertise, do research, build infrastructure, develop products etc. The investment firm is called a venture capital firm, and the money that it gives is called venture capital.

The venture capital firm makes money by owning a stake in the firm it invests in.
What if there is no money to be made? If the cost of gas stays where it is or goes lower?

What happens when a company can no longer continue production at a site because they ran out of money? Think about it long and hard and at the same time think Hilliard Field, near homes, schools, churches, and the gateway to Flower Mound.

1 comment:

Anonymous said...

How the investors will make money is pretty simple. They will sell the operations to someone who is willing to pay for it. The value is not in the gas itself but in the guaranteed access to energy.

Domestic energy market is one of the few control points US can work with when facing competition from the foreign money. In order to guarantee operations in the US, companies from China and India have to buy local energy assets.

The fourth richest man in the world, M Ambani, is already working on this.

It is a pity that part of the world economy and power politics is being played literally in front of our homes. It is amazing that there are local collaborators that are for few bucks ready to sell the American soil and natural resources and weaken our independence.

Another detail is that how much do billionaires in India or China care about safety of the operations here.