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Page added on May 2, 2014
The Peak Oil Crisis: Revisiting Natural Gas
A couple of months back I noted that the U.S. was burning through the stocks of natural gas we store in underground caverns at an unprecedented rate. These are the stocks that provide a buffer so that when the 50 percent of us that heat with natural gas turn on our furnaces each fall there will be enough gas to get through the winter. In the US we usually burn through about two trillion cubic feet of stored natural gas each winter, but during 2012-2013, we went through three trillion leaving only some 800 billion cubic feet left. If we can’t get two or three trillion cubic feet injected back into the storage caverns before November rolls around this fall, we could see much higher natural gas prices and even calls to dial back the thermostats before the storage caverns run short.
Like nearly everything else in our civilization these days our ability to adequately restock the storage caverns this summer is a complicated question. Despite all the hype about our supposed 100-year reserve of natural gas, a gas-based industrial revival, and saving Europe from the Russians by shipping them boatloads of cheap liquefied natural gas, our natural gas industry has not been doing very well of late.
Leaving aside issues of what all the fracking for gas might be doing to our drinking water and the accumulation of greenhouse gases in the atmosphere, there is no question that fracking-for-gas has increased our supplies rapidly in the last few years. However, like all good things the rate of growth in our natural gas production is slowing rapidly and may even stop growing long before most expect. U.S. natural gas production grew by seven percent in 2011, five percent in 2012 but only by one percent in 2013. Some 75 percent of the growth in U.S. natural gas production is now coming from the Marcellus Shale in Pennsylvania and West Virginia. Nearly everywhere else in the country, production is flat or declining.
The gas industry’s underlying problem in recent years has been overproduction which has kept market prices below the costs of production in many areas. Some gas fields produce “wet” gas which contains valuable liquids which can be sold to offset the loss of producing gas alone. Unfortunately the most productive region of the Marcellus shale gas field is largely dry so that many areas drillers are losing money on every well drilled, but are forced to keep drilling and fracking to meet contractual obligations.
Another factor having a major impact on growing our gas supply is that when one strikes gas in the hills of Pennsylvania, there is no easy way to get it to market. While pipelines are being built or upgraded, many wells are shut-in or are forced to sell their gas locally at a steep discount to the prevailing national price. Until recently Wall Street has been happy to finance the billions being spent on drilling and fracking money-losing wells. Loans to money-losing natural gas projects presumably were made in hopes that natural gas prices would soon rise to profitable levels and the money would be paid back. However, basic economics is starting to kick in and it seems as if drilling-at-a-loss may not have much of a future. If this happens, it clearly will not be good for refilling our gas caverns for the winters ahead. The whole issue is murky at the minute. The number of rigs drilling in the Marcellus shale has fallen in recent years, but the industry says it has gotten so much better at drilling and fracking gas wells that the lost drilling rigs were no longer needed. The issue is further muddied by some recent natural gas production reports from the Department of Energy that conflict with other reporting suggesting that some of our gains in natural gas production may be optimistic estimates rather than fact.
On the key issue of whether we can refill the gas caverns this summer in time to avoid shortages in coming winters, the Department of Energy remains optimistic, forecasting that production will increase in 2014. The EIA says increased production coupled with lower demand from the electric power industry (due to higher natural gas prices) will leave our stockpiles in reasonable shape by next November. So far in 2014 we have stored away only 77 billion cubic feet of the 2,600 billion the EIA hopes we will have by November. To achieve this goal, we will have to inject into the caverns some 92 million cubic feet each week between now and November. This rate of injection may be very hard to achieve especially as the increased demand for natural gas to power summer air conditioning has left us with only about 20-30 million excess cubic feet available for storage during recent summer months.
For the coming winter, however, the situation is not hopeless. We are starting about 900 million cubic feet above the empty mark and in some recent mild winters we have withdrawn as little as 1,500 million cubic feet from storage.
The temperatures in the year ahead will be important to what happens to our gas supplies as milder-than-normal summers and winters can cut demand dramatically. Buried in last week’s news was a report that there are early signs that the Pacific Ocean temperature phenomenon known as El Nino is starting to form. If this happens, and we will not know until June, with the effects not being felt until September, we could have a mild winter in the northeastern part of the US this coming year which could lower natural gas demand and keep prices under control.
For now, all we can do is wait to see how this story plays out. The lesson of all this is that we may not have as much readily producible natural gas as we have been told and that production could be leveling out or even declining within the next few years.
16 Comments on "The Peak Oil Crisis: Revisiting Natural Gas"
buddavis on Fri, 2nd May 2014 4:03 pm
Gas storage is not my area, but from a couple of the guys I know who I have talked to, you start running into serious problems when storage levels get to 500-600 BCF. This is a cumulative number, and it becomes difficult to pull gas out of storage when it hits that low. So saying we are 900 above zero is not an accurate portrayal of the situation at hand.
As for injection season that is upon us, we have lots of gas. We have more gas at $5/mcf than we do at $4/mcf. WE have alot more gas at $10/mcf than we do at $5/mcf, and it will take higher gas prices to get more supply. The Marcellus is the cheapest resource play and outside of the sweet spots, none of the other dry gas plays work at $6, much less $4.
With the higher Capex costs, I do not expect these numbers to improve. If we have a hot summer and another cold winter, it could get ugly this time next year.
rockman on Fri, 2nd May 2014 4:03 pm
“The gas industry’s underlying problem in recent years has been overproduction which has kept market prices below the costs of production in many areas”. I wonder what that definition of “overproduction” must be given that the US only produces 93% of hit it consumes and imports the balance. How can US companies be overproducing if there is demand for every cubic foot of NG we can produce and then some. Perhaps they mean US NG companies should reduce their production to force a higher competitive price. Of course any of the companies are free to do that at any time. But while they might sell for a higher price the lower volumes might actually reduce cash flow. And trust me: for almost all companies cash flow is king.
So guess what kid’s: IMHO the NG market is right where it should be: that sweet spot between max sales at the best price. So back to what “overproduction” might mean? Honesty I don’t understand what that means. Should companies damage cash flow to max prices? If so why? Should there be a US NG cartel that restricts the volume of NG sales by all companies? I suspect the gov’t would have a problem with that.
I think the NG (drilling, production and storage)is right where the free market dynamics have dictated it to be.
Northwest Resident on Fri, 2nd May 2014 4:31 pm
“In the US we usually burn through about two trillion cubic feet of stored natural gas each winter, but during 2012-2013, we went through three trillion …”.
The focus of this article is on the coming summer/winter, and will we have enough NG to power those millions of air conditioners and heaters across the U.S.A.
Looks like serious issues are knocking on the door — this year. But what about next year, or the year after? Two – three trillion cubic feet per year is not an insignificant amount. How long can we keep up that volume? Where is it all going to come from even IF it is economically viable to produce it?
Companies are stuck drilling at a loss by contractual obligations right now, Marcellus is the only “bright spot”, and due to lack of capex and financial disincentive the oil companies would rather not even start drilling for more NG. Does anyone see a problem developing here?
Sure, go ahead, raise the price to $10/mcf — see who has enough money to pay for that (hint: almost nobody). If you need $10/mcf to make it worth your while to extract the NG but nobody can afford to pay that price, then I guess that’s a damn shame and people better start stocking up on wool underwear cause they’re going to need it in the coming years.
GregT on Fri, 2nd May 2014 4:37 pm
And to think that some people still believe we’ll convert a fleet of millions of vehicles to run on nat gas.
Northwest Resident on Fri, 2nd May 2014 4:43 pm
GregT — Yeah, it is hard to believe, isn’t it? But just wait a while, Nony will soon be posting on this article, letting us know how silly we are for our pessimism and that if only we tried hard enough then we, too, could believe in a future powered by NG and in American NG exports to Europe.
rockman on Fri, 2nd May 2014 5:21 pm
And then there’s all that LNG we have extra we’ll send to the EU to protect them from Putin.
Kenz300 on Fri, 2nd May 2014 8:15 pm
Saving energy saves money for consumers.
A well insulated home uses less energy for heating and cooling.
LED light bulbs use 75% less energy than incandescence light bulbs.
Many new vehicles now get over 40 mpg when just a few years ago it was much lower.
We are moving in the right direction. We all need to make some personal decisions to save energy.
My local utility offered an energy audit with recommendations for improving the energy efficiency of my home. I took them up on it and now I have a 20% energy savings over previous years. A little insulation and sealing some air leaks goes a long way.
An easy way to save some money. Stop giving it to the local utility or oil company by becoming more energy efficient and making conscious choices to choose energy efficient products.
Nony on Fri, 2nd May 2014 8:57 pm
We used to be a net importer of NGL, Rock. Now we’re a strong exporter. Things can change for NG also.
Given the supply curve of production (see Mackenzie Wood study) as well as the market price deltas to Europe and Asia, it’s a no-brainer that if enough gas export capacity is opened, that 13% will go right away.
And there’s no Zeno’s paradox here. It is possible to pass a point. Take a look at this chart, where’s the line headed? Open some export terminals and watch it DROP!
http://www.clevelandfed.org/research/trends/2013/0513/01intmar-2.gif
Nony on Fri, 2nd May 2014 8:58 pm
Or check this story:
http://www.platts.com/latest-news/natural-gas/washington/lng-growth-to-make-us-net-natural-gas-exporter-21054975
And that’s not like some analysis by Rune or TOD or the like. It’s Barclay’s.
Boat on Fri, 2nd May 2014 9:03 pm
Hold it. I thought ng was the brite spot. Thousands of wells capped because of ng prices not being high enough. Hundreds if not thousands of rigs that went to drilling for oil because $2-$4 nat gas was to low. While it takes time for infrastructure to be built to grow the market, the market for ng will continue to grow at a fast rate. 50 wells on a 4 acre pad will soon be the norm? Efficiency in fracking is just getting started. All the signs are there for major expansion in nat gas for decades worldwide. Just ask coal.
Nony on Fri, 2nd May 2014 9:13 pm
I think coal’s biggest issue is the new regulations just going into effect. It’s still cheaper than NG or the rest of them. But the new regs drive up the cost of scrubbers so it can’t compete.
Nony on Fri, 2nd May 2014 9:14 pm
Reading in THE BOOM about how Aubrey Mclennden actually paid for an anti coal campaign. What a snake.
bobinget on Fri, 2nd May 2014 9:16 pm
One two occasions I submitted this ground breaking
court ruling for publication here. Our editor either overlooked the submission or found fault.
http://www.businessweek.com/articles/2014-04-29/the-supreme-courts-epa-ruling-dims-the-lights-on-coal-power-plants
THIS IS HUGE NEWS for gas, and air breathers.
GregT on Fri, 2nd May 2014 9:36 pm
NWR,
Keep planting those blackberries.
Nony on Sat, 3rd May 2014 8:03 am
All this kvetching about last winter’s close call reminds me of climate denialists getting excited about a cold winter. You have to look at the long term trend, not make a bunch of interpretations from a single season.
If we really are running short of natural gas, then the futures price should be going up. It’s not.
Look at the data, look at where the betting money is. Don’t let your heart rule your mind. I want oil to be 20, but it’s 100. So I live with that data. Similarly, you all want gas to be 15, but it’s not. It’s 4.50.
GregT on Sat, 3rd May 2014 12:29 pm
“Markets can remain irrational, longer than you can remain solvent.”
John Maynard Keynes