Tuesday, January 19, 2010

Using Natural Gas Markets To Model Migration

Migrants, just like investors, can overvalue and undervalue places for a variety of reasons. Aaron Renn's recent article in The Oregonian suggests that Portland is an overvalued destination as a result of progressive urban planning but poor job creation. (Via Chris Briem) I see a striking parallel with the US natural gas market:

In Pennsylvania, landowners are at a disadvantage because gas companies here can provide only sketchy information about production in the Marcellus, a mile-deep formation that lies under much of the state. Here, production information remains confidential for five years - property owners, investors, and competitors must rely on company press releases for incomplete details.

"In most producing states, the public record on initial well tests is available fairly quickly, within, say, weeks or six months," said Leslie Haines, editor-in-chief of Oil and Gas Investor, a trade journal based in Houston.

Said an industry source, who declined to be identified because his business depends on not offending gas operators: "Not having to report production is damn well hurting the lease prices. Your state government up there is leaving so much money on the table, it's not funny."

Stephen W. Rhoads, outgoing president of the Pennsylvania Oil & Gas Association who now works for operator East Resources Inc., said Pennsylvania authorities don't have as much current information about Marcellus production because the shale play is in its infancy.

"It's not a question of having the information that we're hiding, it's a question of having the information at all," he said.

It is a transparency issue, a knowledge problem. Greater uncertainty drives down the bidding. This provides a tremendous opportunity for those who can successfully navigate such murky waters. On the other hand, a sure thing can overheat the market:

In the Barnett Shale around Fort Worth, where leases fetched $150 an acre in 2003, a bidding war between Chesapeake and XTO Energy Inc. sent prices over $25,000 an acre two years ago, said Michael E. "Gene" Powell Jr., an industry veteran who publishes the Powell Barnett Shale Newsletter.

In the Haynesville Shale in Louisiana and Texas, prices exceeded $30,000 an acre in 2008, when natural-gas prices peaked at rates above $13 per thousand cubic feet. They're less than half that now.

"Nothing will ever compare to the Haynesville frenzy that occurred in 2008 - it got way out of hand, and some companies paid a lot," said Haines. "Now, that has died back down to more reasonable levels."

Migrants make similar real estate bids with their feet. Better to go where you know than to roll the dice on an emerging community with a short track record. Thus, geographic arbitrage opportunities in the Rust Belt go unnoticed and Portland essentially turns away top talent. A question Renn posed today, (paraphrasing) why did Nikki Sutton give up on Portland only to try her hand at being an entrepreneur in Indianapolis? She was unable to find even the most menial employment in Portland. But she didn't run through that wall and create her own job so she could stay in "the misty evergreen Shangri-La for the young".

Sutton may be an exceptional case, but she may also represent a growing trend. In "Hollowing Out the Middle", Sutton would be the prodigal daughter who returned home defeated. These "Returners" are failures who are doomed to the same fate as those who never left. Sutton is a square peg for that round hole. Or, she embodies the undervalued talent that rural towns ignore. To me, Sutton personifies the Rust Belt city: A diamond that stays hidden in the rough unless chance reveals its true value.

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