Natural Gas Service

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Oil at $100 a barrel, natural gas at 10-year low. The new normal or will the shoe drop?

The U.S. is the largest producer of natural gas in the world, and gas is the primary source of heat, hot water and cooking in homes and businesses throughout our nation.

And in the last five years, the U.S. has perfected techniques for unlocking natural gas and oil from vast shale reserves. This practice of drilling horizontally into shale rock formations involves a process called “hydraulic fracturing“– pumping fluid into underground rock to push up fossil fuels – is economical and fruitful. So fruitful, it’s increased the average daily production of natural gas by nearly 20 percent in fewer than six years.

With supply outstripping demand, prices are collapsing and natural gas is at a 10-year low. How low is low? By comparison, a barrel of oil costs around $100 and an equivalent amount of natural gas should cost around $16. But today wholesale natural gas is priced at $2.40. It wasn’t that long ago, in the summer of 2008, that natural gas was at $13 and even slightly higher just after Hurricane Katrina in 2005.

Plentiful, lower-cost natural gas is good for the customer, but not necessarily so good for the producers. How long can it stay this low before producers start to bail? The predominant view today is that the price will remain low for at least the next year or two when liquefied natural gas exports, new gas-fired electric generation and coal-to-gas conversions will begin to increase the demand for gas. Any hurricanes in the Gulf or biting cold winters across the country could change the picture in an instant.

In fact, weather, in the form of an unseasonably warm winter across the country, is a primary reason the market has had lower demand for natural gas in recent months. November, December and January — traditionally the highest use months for natural gas – have been mild. Forecasters widely believe temperatures will stay warmer throughout the remainder of the winter.

That means less natural gas used for heating–further widening the gap between supply and demand. U.S. natural gas storage capacity was full going into last November to prepare for the cold winter which never materialized. So coming out of this winter, storage will still be relatively full, denying producers a demand for their gas since injections to refill the inventory aren’t needed – and to a large extent aren’t even physically possible.

Given the warm weather, resulting lower demand, rising natural gas supplies from fracturing and resulting lower market prices, the economics are not favorable for operating natural gas-only wells (aka “dry wells”) with these low prices. At some point, analysts say, natural gas producers will have to start curtailing production.

One of the biggest shale gas producers has already started pulling back from some wells. If prices continue to fall, others will reduce drilling rigs in “dry gas” fields that produce only natural gas so that more oil-based liquids plays can be developed. Wet gas products including oil or “liquid gold” bring a higher price in today’s market – remember $100 per barrel – offsetting the rock-bottom price of gas. Producers will first bring to the market the products that have the highest returns.

In addition, three other developments mentioned earlier could have a substantial impact in the longer term in absorbing the supply glut. The U.S. typically has been an importer of LNG. When chilled to very cold temperatures natural gas changes into a liquid. Because it takes up only 1/600th of the space that it would in its gaseous state, LNG can be loaded onto tankers and moved across the ocean. When this LNG is received in the United States, it is held in large chilled tanks and turned back into its gaseous state to add to pipelines.

Because the U.S. price for natural gas is at 10 year lows and the price for natural gas across the oceans is much higher, developers are looking at reversing the process at these LNG facilities – liquefying pipeline gas and placing it in tankers to ship worldwide. And electric utilities will be bringing on additional gas fired power plants to either meet the growing demand for electricity or to replace aging power plants.

The bottom line for the market, the consumers and the producers? Aren’t low energy prices always a blessing? Only to a point. And then the market must and will correct itself. If it costs natural gas producers more to continue operating their wells than they can sell their product for, they will stop operations of those wells. Businesses can only stay in business when they can cover their costs.

The upshot for consumers today is: lock in a fixed rate with your natural gas marketer now while prices are low. Review your existing contract. See how long you are committed to your current rate – especially if it isn’t “low” by today’s 10-year low benchmark. Don’t opt out of your current contract if substantial penalties aren’t offset by the savings in a lower gas rate. The average Georgia gas consumer needs a14 cents per therm savings on the gas price for a year to offset a $100 cancellation fee.