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Schork Oil Outlook: Marcellus NatGas on Hold in NY?

Yesterday (Wednesday), the state Senate in New York threw up a roadblock to the state’s plan to tap into its slice of the Marcellus Shale natural gas pie. The Senate approved a mandate for a moratorium (there’s that word again) on new drilling permits through May 15, 2011 to allow the state to study the effect of hydro-fracking on the water supply.

The bill still has to pass through the state Assembly and the Governor’s desk for signature, but in light of Deepwater Horizon it is hard to imagine this bill not passing; for instance, the Senate’s version passed by a 49 to 9 margin. Therefore, the likes of Chesapeake Energy, Southwestern Energy et al. will likely have to wait another ten months before ramping up operations in the state.

Be that as it may, the market appears unfazed by this news. Chesapeake was up 2.8% yesterday and Southwestern rose by 2.3%. In fact, the NYSE natural gas index, XNG, surged 1.3% to a month-and-a-half high. Thus, it can go without saying that the Street is somewhat skeptical regarding any long-term ban on drilling in the state.

According to New York’s Division of Budget, the state’s projected budget deficit through fiscal 2010-11 is $8.2 billion. Therefore, the Street’s skepticism regarding an impasse that could prevent the infusion of $2 billion to the state’s coffers by 2015 (according to a study by Natural Resource Economics), in our opinion, is certainly well founded.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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