A House Divided

Is energy policy dividing the country in the same manner as the divergent commodities and manufacturing economies of the pre-Civil War United States?

Now, more than ever, lines are being drawn around the fundamental concepts of how to (literally) fuel our economy. States who have placed their land and shores "off limits" to drilling are populated by the same voters who decry American involvement in the Middle East, advocate the use of alternative fuels, complain about the high price of gasoline, and advocate ending so-called tax "breaks" for oil companies.

Policy aside, these divergent views represent fundamentally different views of the role of government and private enterprise--and the chasm seems to widen every day. A Secretary of Energy whose goal is to drive gasoline prices as high as possible is acting not as a referee in the market, but judge, jury and executioner. The same may be said for an administration for which government, not the market, decides which energy sources will grow through subsidies, while others are saddled with taxes and regulation, with the ultimate goal to drive the fuels of "yesterday" into the ground.

Even more alarming is that the government led view is simply not supported by facts, but dogma and religious-like zeal matched only by the Taliban. This should be an alarm to all Americans who value the liberty of the free market system, since once government controls energy, it controls the economy.

LOWER GAS PRICES REDUCE SPENDING, SLOW PRODUCTION, AND BRING OUT PROBLEMS IN POORLY CONSTRUCTED LEGAL RELATIONSHIPS

Natural gas stocks are getting hammered.

Gas prices down to just $2.77 per MMBtu and some analysts predict a fall to $2.50 per MMBtu is possible.

Add to that the fact that the Marcellus is just about the only area in the country where break-even prices are below $4.00.

It’s tough out there from a cash flow perspective, especially for companies who modeled their development on higher gas prices. This means look for reductions in capital expenditures and slowed production. Hopefully, this also means that prices will eventually rise and the market will sort out the problem.

However, thinly capitalized companies, with more exposure to short term price swings, might not survive the pain of such an adjustment. This includes many “low cost” producers who charged into the Marcellus on peak prices.

From a lawyer’s standpoint, these adjustments, shake outs, or whatever you wish to call them, have a way of bringing forth the flaws in old bargains to produce litigation. Low-cost producers were attractive a year ago, but some of them, and their counter-parties, acted with more expediency than common sense in crafting the legal aspects of their relationship. Unfortunately for those companies, this was a “pay less now versus pay much more later” scenario, with cash flow problems stemming from lower prices compounded by the distraction and expense of litigation.

It may be time to dust off those contracts.