The Haynesville Shale, a sedimentary rock formation spanning parts of northwest Louisiana, southwest Arkansas and northeast Texas, could contain the largest natural gas deposit in U.S. history.
New technology has made extracting natural gas from the shale commercially viable in recent years and created wealth opportunities in some of the state’s more impoverished parishes. And while not everyone can become a shale-onaire—the nickname given to landowners who become rich by leasing to natural gas drillers—new sources like the Haynesville play are a boon to the Capital Region and its petrochemical industry, which relies heavily on natural gas as a raw material for its products and as an energy source.
The economics of natural gas differ from oil in part because the markets for gas are more regional. About one-fourth of the energy used in the U.S. comes from natural gas, according to the American Gas Association, and almost all of that comes from North American sources.
There isn’t an international organization like OPEC that can dictate prices to the rest of the world. Instead, natural gas prices can swing wildly based on supply and demand, weather and other factors.
Prices averaged $4.10 per million British thermal units from 1990-2010, according to New York-based Trading Economics. On any given day, however, gas was as cheap as $1.05 and as expensive as $15.38; today, prices are between $3 and $4. One Btu represents the amount needed to heat one pound of water one degree Fahrenheit.
Louisiana Economic Development Secretary Stephen Moret says the U.S. has moved from an expensive and volatile natural gas market to one with prices that are much lower and that are expected to stay reasonably low and stable for years—perhaps even decades.
“That is a gift from heaven,” Moret says. “The competitiveness and the outlook for our chemical industry are dramatically better than they were two years ago.”
And unconventional shale plays are a big reason why. Louisiana chemical industry was in real danger of losing facilities, Moret says, as companies were tempted by low-cost feedstocks in the Middle East and Asia. Many facilities have become profitable again, and companies see Louisiana and Texas as logical places to expand.
An international company like BASF not only competes against other corporations, there’s also internal competition over which facility might receive a specific investment. Tom Yura, general manager of BASF’s Geismar plant, says low natural gas prices give the U.S. a significant advantage over Asia and Europe, where heavier, oil-based feedstocks typically are used.
“The stability for us here in Louisiana is good because then you can plan,” he says, adding that the proximity to shale sources nearby also is comforting since transport costs are low.
BASF had a strong third quarter in North America in part because of natural gas prices, which is an especially big deal coming out of a global recession.
“Could you imagine if natural gas was still $13 or $10 per million Btu?” Yura says. “People would say, ‘Geez, your stuff is really expensive. I don’t think we want to buy much of that right now. We’ll just sit and wait.’”
Louisiana relies largely on natural gas for power generation. In a 2008 survey, Moret says LED found high energy costs to be the most significant state-level concern. If natural gas stays near the $5 level, as many experts believe it might, he says energy costs could go from a hindrance to economic development in Louisiana to a selling point for potential companies.
About 70% of Entergy’s power generation comes from natural gas. For an Entergy Gulf States customer in Baton Rouge, a monthly bill for 1,000 kilowatt hours might have cost $128 when natural gas spiked to $13 in 2008, spokesman Jeff Holeman says. That same bill would be $93 today. Multiply that difference for an industrial customer that uses millions of kilowatt hours every month, and the impact adds up.
But low natural gas prices aren’t good for everyone. Supplies of natural gas are near an all-time high, and gas futures have struggled to trade above $4 per million Btu, Dow Jones reports. Companies working the Haynesville play need natural gas at about $4.25 to break even, Louisiana Oil & Gas Association President Don Briggs says, adding that companies are starting to pull out.
“They’re all going to go and drill oil plays because oil prices are up,” Briggs says. “You can’t make money in natural gas right now. It’s a total loser.”
For buyers, obviously, lower is always better when it comes to price. But for the total natural gas ecosystem, Moret says, the sweet spot is probably somewhere in the $5 to $6 range. At that level, consumers would still get competitive electricity rates while extractors could still make a decent profit. Companies in southwest Louisiana might need a higher price than those working the Haynesville play, he says, because their extraction costs are higher.
Over the next few years, Louisiana has a shot at two types of projects that could be worth billions. One is occasionally called gas-to-liquid, in which huge plants convert natural gas to diesel or jet fuel. Gas can also be liquefied for temporary storage and shipment, a process known as LNG; gas from Haynesville Shale could be converted in Louisiana, in a multibillion-dollar facility with high-paying jobs, and shipped to Europe.
“I’m not saying we’ll have an announcement next month,” Moret says. “But in the next 12 to 18 months, several of the major billion-dollar-plus capital investment opportunities in Louisiana relate in some direct or indirect way to what’s going on in natural gas. … If current trends continue, we’re going to see some pretty exciting, pretty interesting projects.”
