tl;dr: Saw it coming. Didn’t act. D’oh.

I did a podcast recently about water treatment in oil and gas for Platt’s, the veteran trade publisher in the sector. We focused specifically on flowback water and produced water from shale sites. You can listen to it here:

http://www.platts.com/PodcastsDetail/oilmatters/2012/March/oilmatters28

I’ve spent a lot of time hunting for new technologies that address shale oil and gas, water treatment included. I think it’s possible to build large, independent technology companies in this domain – most likely with services business models – and we’re eager at Venrock to deploy some capital into the sector. But putting my professional life aside, I missed my opportunity to make a personal buck here three years ago.

I first realized that something was up in shale plays back in mid-2008 (prior to joining Venrock, when I was at Lux Research). I’d been tracking two numbers – on one hand, the Baker Hughes rig count for natural gas rigs (which tells us how much drilling for natural gas is going on in the U.S.), and on the other hand U.S. dry natural gas production (which tells us how much gas is coming out of the ground). Based on that data, I started presenting the following two charts (originally sourced from The Oil Drum, which I read daily and you should too):

On the left, you see the number of natural gas drilling rigs in operation. The x-axis is months, so every year is a line. And every year the number of rigs goes up – until late 2007, when it’s flat.

On the right, you see the amount of natural gas extracted. Same deal; every year is a line. And every year gas extraction is roughly flat – until late 2007, when it kicks upward.

Huh? Less drilling, but more gas?

This, my friends, is the impact of a technology disruption – specifically, the combination of horizontal drilling and hydraulic fracturing applied to shale formations.

I vividly remember presenting this data in the boardroom of a prominent east coast venture capital firm in early 2009. The partners there knew a lot more than I did about the oil and gas industry, so I approached the talk humbly. If this increase in supply persisted, I said, think of the possibilities! The 10-year average price of natural gas was about $7/mmbtu, but the price going forward could be more like $4.50:

And if that occurred, it would have a big impact on the world:

• Coal generation would lose its cost advantage. We’d become a nation of baseload gas.
• Natural gas as a transportation fuel – and a feedstock for chemicals – would become increasingly attractive. At the margin, cheap gas could swing siting decisions for manufacturing facilities toward the U.S.
• Renewables would get kneecapped on an unsubsidized basis. Fuel costs account for about 70% of the levelized cost of electricity (LCoE) from natural gas plants, so a 33% decrease in gas prices would mean a ~15% decrease in LCoE – further raising the bar that solar and wind would have to clear to compete with gas-fired generation.

It was at this point that my hosts started shaking their heads. As much as they wanted to believe my thesis, they said, they’d heard it all before. Every time the price of natural gas dropped into the $4-5/mmbtu range, they patiently explained, everybody thought it would stay there forever. But it never did – it always went back up, dashing hopes, dreams, and business plans.

I listened carefully. And as I did, I mentally shelved my plan to short UNG, the exchange-traded fund that tracks the price of natural gas – because my expectation of long-term gas pricing in the $4-5/mmbtu range clearly wouldn’t come to pass.

That was three years ago. As of this morning, natural gas was at $2.11/mmbtu. The futures curve currently has the price under $4.50 through 2015, and it even pegs the 2020 price at a mere $5.33. (I keep this market data permanently open in a browser tab window.)

Live and learn, right?