Intense demand for gas in Asian markets, combined with overstated reserves, is likely to lead to increased domestic prices for natural gas. For building owners in NYC who are affected by new heating oil rules, this is cause for deep hesitation as they consider their options. Buildings are now required to switch from polluting #6 oil by 2015, and from #4 oil by 2030. Those who had been considering converting to gas boilers on the basis of “cheap” fuel will want to look at both the historical price fluctuations and recent trends and revelations:
Export is the name of the game. Any doubts about the true intent of gas drillers and pipeline builders should be erased by the fact that gas is now selling for nearly $16 per unit overseas, while the US price remains below $4 per unit. The break-even point for drillers is $8 per unit. Once the proposed pipelines and LNG export terminals are up and running, domestic prices will rise to compete with global demand.
Supply is overstated. In contrast to industry claims that reserves contain a “Saudia Arabia of gas,” production has proven spotty and often quickly depleted, leading many to refer to gas drilling as a Ponzi scheme. Energy consultant, Arthur Berman, terms estimated recoverable supply as hyperbolic, overstated by “at least 100%.” As reported in The New York Times, the SEC is now investigating the possibility that drillers have inflated performance reports and may be duping investors. Flipping leases in the same way bad mortgages were bundled and resold, and continually drilling new wells to keep up production forecasts, is one way producers may be able to appear profitable.
For New Yorkers who commit to gas-only contracts, this could prove an unfortunate long-term choice. Once their oil tanks have been disabled, they may lose the option to burn liquid fuels. While the cost of converting to gas can run $350,000 or more, converting to biodiesel or #2 oil could cost less than $10,000, and is a better choice for the environment.