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Shale Gas: An Opportunity Wrapped in a Dilemma

Low prices have made dry gas from shales a producers' problem and an end-user's dream. But interests at both ends of the market do agree that the right gas price -- the equilibrium price -- would make shale gas a boon for the country.

The United States should be exporting more chemicals, glass, steel, aluminum and other products, but the country's leaders should think long and hard before adding liquefied domestic natural gas to that list, a Dow Chemical executive said Wednesday. While end-user industries fear higher gas prices, producers are looking to all potential demand sources to lift gas prices and make their dry gas operations economic once again.

Dow's Ken Bromfield, North American commercial director for energy, said trying to "artificially accelerate" gas demand growth by incentivising natural gas vehicle adoption and power plant conversions to natural gas -- or by embarking on liquefied natural gas (LNG) exports without considering fully the domestic market impact -- will harm the nation's manufacturing sector by driving up energy prices.

"Any permits that come up to export LNG we think need to go through a rigorous analysis to determine the economic impact on our economy, on jobs, with some priority given to the manufacturing sector," Bromfield said. "We are not saying and have never said, 'don't do it.' But it certainly needs to have that kind of analysis because we're very early in shale...Until we know how much we have here, it's important to the country that we look at this and say, 'where can we create the most value.'"

Export a Btu of natural gas as LNG and the gas has been "burned once." However, if that low-priced gas stays at home and stimulates domestic industry, the benefit is eight-fold in the form of direct and indirect jobs and other benefits, Bromfield said at Summer NAPE 2012 in Houston.

"We have an unprecedented opportunity with shale gas to push the reset button on the way we use energy in this country," Bromfield said. "And that could not only have a tremendous impact on the oil and gas industry, but if we handle it the right way...it could have a tremendous impact on the economic growth and vitality of the United States. Handled poorly, it could end up being the largest wasted opportunity of our generation."

Gas producers have been telling the shale story for some time now, with particular emphasis on its benefits to the country. Southwestern Energy Co.'s Jim Tramuto, vice president of corporate development and government affairs, has been among them.

"Under any scenario that you look at, the [gas resource potential] numbers just continue to grow because we continue to get smarter and smarter at what we do and how we do it," Tramuto said at NAPE. "If you look at the fact that in the year 2001 we had a 60-year supply...Where are we today, we have a 100-year supply, and that number is growing. We knew about shale, but it was uneconomic to develop it and, quite frankly, it was trouble many times when we were trying to drill through it. Today it is the source rock and that is the target."

However, dry gas production from shales has become uneconomic again for many producers, and they've shifted their efforts to liquids-rich and oil plays instead. Today's gas prices are not sufficient to support the development of many of the country's resource plays, Tramuto said.

"We do need to see prices get better, and that's where demand will come into play," he said. Above $4 would be a good place for prices to be to support dry gas activity, he said.

Producer community efforts to grow demand have focused lately on natural gas vehicles. Tramuto said he is very bullish on the ability of power generators to burn more natural gas. LNG exports, if they come to pass, would be welcome, too.

"We see that as another market and if those projects get certificated and they get built, then we'd sure like to be able to sell into them," Tramuto said. "But we're not investing in any project. We just view that again as another market and it could be a very good market, just like we view the power plant market and the industrial market. I've been out to Ken's [Bromfield] shop many times because we like those guys. They burn a lot of our gas, and we need that."

But talk of stimulating demand to support gas prices makes large end-users like Dow nervous.

"We consume at Dow the energy equivalent of 850,000 barrels of oil each day. That's as much as the country of Australia. And the majority of that energy is used for raw materials...everything from plastics to clean water filters. We have a lot to say about demand," Bromfield said. "When you look at the demand picture, growth is projected for almost all economic sectors. Among the many stakeholders there is plenty of domestic natural gas demand for decades to come. And this analysis doesn't even consider that one-third of the shale gas supply is needed simply to offset declines from other sources of gas."

Bromfield said there are too many variables affecting domestic gas prices to pick a number and say that is what is required to bring equilibrium to the market and satisfy both producers and end-users. "...[A]s demand continues to increase from manufacturing, that equilibrium point will come..." he said. "That equilibrium level will set itself whereby producers can make a good return and yet we still have this national competitive advantage to use to be able to spur our economy. So we think it's happening and we just have to be patient and not let this short-term phenomenon impact our policies.

"When gas was $7 or $8, in about 2005-ish, we had almost a $10 billion trade deficit in basic chemicals. In 2010 when it was $4, you had almost a $5 or $6 billion dollar trade surplus. So it makes a big difference."

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