Overview: Impact of the shale gas revolution on the coal industry

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Must-know: Why coal producers' stocks are declining (Part 5 of 10)

(Continued from Part 4)

Impact of the shale gas revolution

Over the past decade, companies have invested heavily in extracting gas trapped in the shale rock formations thousands of meters below the earth’s surface. The process wasn’t viable economically until the start of 21 st century. Technological developments in drilling and fracturing made shale gas extraction an attractive investment proposition for these companies. This led to the boom in shale gas production starting mid-2000s, which led to sharp decline in gas prices in the U.S. Shale gas is now the biggest contributor to the overall natural gas production in the U.S.

According to the projections of U.S. Energy Information Administration (or EIA), shale gas production is expected to continue to grow in the coming years. As a result, the use of natural gas for electricity generation will grow as older coal-fired power plants are retired and replaced. Natural gas fired plants will take the cost benefits and reduce carbon emission.

Who has benefited from the shale gas boom?

The shale gas boom has been a boon for following industries:

Petrochemical companies like LyondellBasell (LYB) have benefited from the shale gas boom as ethane, a bi-product of natural gas, prices have been reduced due to a drop in natural gas prices. These companies use ethane as a feedstock to produce other chemicals. Lower prices of ethane have resulted in a lower cost of chemical production. This is particularly significant because the chemical companies, particularly in Europe ,still have to rely on costly Naphtha, a bi-product of crude oil, to derive other chemicals.

The shale gas revolution has helped electricity producers save on fuel costs. The electricity rates are typically decided based on the total sum of operating cost, cost of capital, and normal return. The lower input prices for the producers have indirectly helped the consumers. While the electricity rates have increased over the past decade, the increase would have been much steeper without the influx of cheap natural gas.

Sectors with negative impact of shale gas boom

Not all the sectors have benefited from the shale gas boom.

The shale gas boom has made naphtha crackers less competitive as they have to rely on expensive crude oil to derive other chemicals.

With the influx of cheap natural gas, coal has lost momentum. This is evident by the fact that coal, which generated over half of the electricity a decade ago, now contributes only 39% in electricity generation. On the other hand, natural gas, which accounted for only 18% electricity generated a decade back, now generates 27% of the total electricity. The proportion has dropped from 30% in 2012 to 27% in 2013 on account of rising gas prices.

If gas prices are rising and coal is gaining market share, why are coal companies such as Peabody Energy (BTU), Arch Coal (ACI), and Alpha Natural Resources (ANR) not doing well? The answer lies in environmental, regulatory, and global factors. Continue reading the next sections in this series to learn more.

Continue to Part 6

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