the problem of Natural Gas

Finding natural gas is one thing, bringing it to market profitably is another. During the last big oil boom of the late 1970s and early 1980s, companies such as Dome and PanArctic were hot by virtue of the onshore NG prospects. Those proved to be busts.

Large known NG deposits in places like Iran and Turkmenistan remain underdeveloped from a combination of political risk and the high cost of moving that gas to final markets. Both pipelines and liquefaction facilities are quite expensive. The supergiant Northwest Dome field offshore Qatar in the Persian Gulf has been known for decades, but is only now being developed commercially.

Natural gas is very price-inelastic. A small increase in supplies can bring a large decrease in price and render projects uneconomic. By the late 1980s and early 1990s, production in the U.S. was being shut in for that reason.

Anything found in the Arctic is going to face these same logistical and political risks plus the difficulties of operating in the Arctic environment. Maybe the sea ice is breaking up, but it is still an extraordinarily hostile environment.

Lower NG prices in the current market will have only a limited impact on petroleum prices. NG competes with residual fuel oil in industrial applications and with heating oil in space heating. Some residential use will be diverted to NG, but this really does not drive crude oil prices lower. And as we are not in heating season, the heating oil substitution will be nonexistent.

The risk still goes the other way: A hot summer or a few nuclear power plant closures and NG now going into storage will get diverted to electric utilities. And who knows what the hurricane season will look like after 2004's Ivan and last year's Katrina and Rita? It is a tough market to be aggressively short.