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How oil prices impact natural gas, US shale boom’s darker side and rail gridlock

While oil prices have stabilized for the moment and associated doomsday scenarios have slowed, here’s a detailed analysis of the interplay between various commodity prices and some of the investment decisions petrochemical companies, producers and LNG businesses face. “Indeed, even international buyers of natural gas were aggressively pursuing hub based gas pricing contracts with view towards hub-based pricing being preferable to oil-based contracts. However, according to the Energy Intelligence Group, with current Henry Hub prices, a Brent price of $80 per barrel for oil (and a slope of .145), the arbitrage opportunity to Asia drops to about $1 per one million British Thermal Units.” [CSIS]

Japanese trading house Sumitomo recently took a $1.55 billion writedown on a Permian Basin investment it made on acreage owned by Devon Energy. One reason North American unconventional resource plays originally became so attractive was their relative lack of exploration risk. Companies knew for decades that hydrocarbons were trapped in shale and other tight formations, but did not have technology to make production economic. Geologic risk remains however, as Sumitomo discovered the hard way. “Even if the technology seems like it can do it, the geology turns out to be very complicated,” Takahata said at the Sept. 29 briefing. “A big issue now is how to be able to see beforehand what risks lie below ground.” [Bloomberg]

Increasing volumes of grain and oil moving by rail through Midwestern states are exacerbating bottlenecks in the system and rippling outward across the US and Canada. “’We’re quickly approaching a time where none of this works,’ Mr Harrison [Canadian Pacific CEO] said of the combination of rapid traffic growth and slowly tightening regulation that the industry faces.” [Financial Times]

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