"It puts natural gas in particular in the spotlight because it is clean-burning, it's American and plentiful."

-- Shannon Nome

When T. Boone Pickens testified before Congress in July, he recommended that lawmakers read a report [PDF] by Deutsche Bank offering a bullish assessment of new discoveries of natural gas shale and improvements in extracting it. Pickens used the report as proof that his plan to use natural gas to fuel the country's cars is viable. NationalJournal.com's managing editor, Lucas Grindley, spoke with the principal researcher of that report, Shannon Nome. During the interview, Nome considered the impact that implementing the "Pickens Plan" would have on her findings. Edited excerpts follow. Visit the archives page for more Insider Interviews.

Q: T. Boone Pickens has repeatedly pointed to your report as reason to adopt his plan to get rid of our dependence on foreign oil by increasing wind power and then using natural gas for our cars. Have you heard anything from Pickens himself or from senators? He did give your report to the senators while testifying.

Nome: Nothing from the senators. I have had a fairly regular dialogue with some of Boone's henchmen who run BP Capital's portfolio. But no, I have not, to date, had any calls from legislators.

Q: When you were writing the report, did you have any inkling that Pickens might be interested in it, or did he just hear about it afterward?

Nome: The last time I saw Boone was late last year, and I spoke briefly with him in a meeting. And at the time, BP Capital was fairly bearish on the commodities, and I think it was noted publicly in his commentary soon thereafter that they had a bearish position heading into the first quarter but then reversed that soon after. So I remember the conversation because I felt like my views were a little different than his at that time.

Q: He seems to have come around to your view.

Nome: Well, I certainly don't know that I had anything to do with it. I was maybe a little earlier than he was in coming around to it. But definitely part of what I advocated was that where we do have supplies in the U.S. are these areas like shale that require a higher clearing price to justify their economic development. And further, that as more and more of the mix became shaley, if you will, the intrinsic decline rate of our base would steepen, and so it made it more and more of a challenge. You have to keep prices high to continue to incite the drilling, and I thought those were kind of bullish factors for natural gas. At that time, he had this investment in clean energy, and so he was already a believer in natural gas uses for vehicles. It may have just been over the course of the first part of this year that he realized that, with these shales, there was a ready supply source to argue for transitioning the U.S. from motor gasoline to natural gas.

Q: Let's talk about price, because you make a point that it is developable and marketable because the price is where it is. What happens if the Pickens plan is instated and then everything is blown into flux and natural gas is used to power cars? What would happen to demand and then price?

Nome: I think it could be quite explosive to the positive side. I don't think it happens overnight, though. It takes quite a while for natural gas vehicles to be manufactured and for gas stations to convert or at least add the ability to refuel with [clean natural gas]. You've got to get people to reinstall or sort of retrofit their homes to accommodate refueling. So yeah, I think it's a slow move, but I do think it is, in aggregate, a very major potential demand component that is not even in anyone's supply-and-demand model yet.

Q: So there is no way to predict the price of natural gas based on the Pickens plan?

Nome: There are just too many moving parts. I'm afraid not. It's such a weather-driven market at this moment that you would be taking a pretty rough swing at that one.

Q: Gal Luft, the executive director of the Institute for the Analysis of Global Security, wrote in the Los Angeles Times about natural gas shale, saying, "Just like oil shale, such unconventional energy sources hold great promise. But their recovery costs are still high, and their existence has not been able to suppress the rising price of either oil or natural gas." Is it safe to say your report seems to concur that natural gas prices will not decline as a result of all these new discoveries and new production?

Nome: That's my view. I think gas prices will continue to be volatile around a given range. In fact, even since I wrote that report, prices have fallen precipitously. I think $13 [per million British thermal units] -- which is where gas was back in June when I was writing this, for the most part -- proved to be too high for the market. So as always with a commodity, there is give-and-take. The price will be set at wherever the high marginal cost production is and where that crosses over with the demand. It's a fine balance.

In my view, some of the better shales that we outlined in that report work at gas prices as low as $6 to $7. Without a doubt, there are others that are not quite as economic that are going to require prices that are $8-plus. With prices kind of having plummeted down to below $8 right now, I think all but the best shales would be challenged if these prices hang on for a long period of time. I think the right price is probably $9 or $10, longer term. That's not a bad assumption to use where demand is not overly challenged but the supply is. You can justify drilling for these shales at those types of prices and get an economic return.

Q: It's a basic supply-and-demand situation. With supply increasing here in the U.S., you are forecasting that demand will increase at kind of an equal pace and that's what keeps the price stable?

Nome: Yes, right.

Q: Luft also says the U.S. consumes 23 percent of the world's natural gas and has only 3 percent of the world's reserves, and that the world's reserves are concentrated in five countries -- Russia, Iran, Qatar, Saudi Arabia and the United Arab Emirates.

Nome: It certainly sounds directionally right.

Q: So if we have this great increase -- let's say the price of natural gas makes it so that all of the shales can be worked on and we have this 20 percent recovery rate that maybe gets better. Is that enough so the U.S. becomes a player on this list of countries that are holding on to the world's reserves of natural gas, or does it not really make that much of a difference in the world stage?

Nome: I don't think it would. I think we are going to need more than just one big field.... To go from 3 percent to something that is going to rank among the top countries is a pretty big stretch for us, I believe. I would probably downplay that possibility. In any case, we will certainly continue to have more consumption relative to our reserves than most countries, even with the shales.

Q: You mentioned in the report that we don't have much ability to export natural gas. Is at least part of that because of infrastructure? It also mentions that in certain areas of the country the prices are different just because of infrastructure issues.

Nome: Yeah, it's all infrastructure. Exactly. We've built re-gas facilities, but we have never built liquefaction. We really do need investment in pipelines and in storage, and maybe ultimately, if shale gas is all it's cracked up to be, we may be advantaged to build some liquefaction and export capacity so we can improve transparency in our gas prices with the rest of the world.

Q: What kind of laws could be changed to help boost production for natural gas shale? For example, there is a lot of talk about infrastructure in the form of pipelines. Is that something the market would prefer the government to deal with, or is that something they just want tax credits to help build?

Nome: Yeah, tax credits are the easiest way, and there were some tax credits in the years past for unconventional production of, for example, coal bed methane, which was sort of the shale story of the early '90s.... There were tax credits at the time that highly incented the drilling of coal bed methane or unconventional resources, and when those expired you saw drilling fall off quite a bit. So those work.

Then the other thing the government, of course, could do would be to incent the carmakers to produce natural-gas-fueled vehicles, which would pull up demand and ensure that prices stayed firm enough to ensure that we continue to drill for gas here in the U.S. and have plentiful supplies. Kind of a chicken-and-egg, isn't it? You need to have the demand strong enough to keep the price high enough, but you also need the supply to be plentiful enough to ensure that new demand markets can be met.

Q: Along those lines, the report says "companies are exposed to drilling risks and regulatory and environmental delays amid an increasingly inhospitable domestic political backdrop for energy producers generally." Are you saying the political backdrop we are seeing now affects production levels?

Nome: I think it has, certainly. The threats from the Obama camp of windfall profits taxes are definitely damaging. I am not sure what the windfall is or how you measure it. There have been some interesting write-ups about the profitability of Google relative to ExxonMobil, but there is no talk of a windfall profits tax on technology companies right now. Big Oil has been a ready target because historically it has been painted with the brush of being environmentally insensitive. I think a lot of that has been very overdone.

I actually think the inhospitable political environment is becoming a lot more hospitable given the recognition that energy prices have been too high and that we are too reliant on a lot of countries that don't really care that much about our economic well-being. So I think it puts natural gas in particular in the spotlight because it is clean-burning, it's American and plentiful via these shales.... The Obama and the McCain platforms are saying we need to drill, we need to drill in new areas, but we also need renewables. We need pretty much every source we can to reduce that reliance. And natural gas seems to have a place in both parties' energy policy.

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