The Natural Gas Shakeout

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"Natural gas prices have made the entire sector ripe for takeover."

If you didn't think America's energy policy battles could get any more confusing, consider this: Some fossil fuel companies are pulling for a carbon tax. Specifically, companies that focus on cleaner-burning natural gas would benefit from subsidies for energy that generates less carbon dioxide.

However, squeezing a carbon tax through a pro-coal Republican majority means that the natural gas industry has its work cut out for it.

Overproduction has led to a natural gas surplus. According to the U.S. Energy Information Administration, the United States had a record-setting amount of natural gas in storage this year, about 3.8 trillion cubic feet.

The makings of the surplus started in 2003 with a new well stimulation method, horizontal hydraulic fracturing, which enabled drillers to get more gas out of wells. Companies started drilling and producing like crazy.

Recently drops in nat gas prices are making it competitive with coal, but natural gas needs more than a favorable cost comparison to compete.

Coal has not only an infrastructure for transport and distribution, but also powerful lobbyists. "The natural gas lobby just hasn't gained enough traction to overcome coal's power," says Joe Magner, analyst with Macquarie Capital USA. They're developing it, but it will be a long time until natural gas is woven into the fabric of American fuel.

Magner thinks gas-geared companies can do a several things to survive: move back towards oil assets, prepare for a dip in gas prices by hedging and watch spending on new projects, keeping plenty of accessible cash. Or they'll need to sell to a bigger oil company.

America will eventually need a non-oil fuel, says Segrich, but it's clear to see that shift will take time. The brief dip in natural gas prices made nearly the entire sector ripe for being scooped up and bought out.

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