Too much natural gas in the US?

Can you have too much of a good thing? Yes, when it comes to US domestic natural gas production, absolutely yes. Ten or twelve years ago most energy analysts believed that the US had to become a net natural gas importer, as economically viable domestic reserves had been almost exhausted. Well, completely wrong prediction.

What most analysts had missed was a phenomenal “fracking revolution” that dramatically increased both oil and natural gas production in the US. This revolution  brought huge economic benefits to many stakeholders, while lowering electricity prices for both industries and millions of American consumers, (natural gas is used primarily for electric power generation). Indeed, farmers from Texas to Pennsylvania could lease their land to the fracking companies for good money. Scores of new companies got into this promising fracking energy business. They hired thousands of workers for rather well-paying jobs. And all these energy-related activities fueled the local economies in many states. Everybody gained: from restaurant owners to shop keepers, from equipment manufactures to the trucking companies that delivered it on site.

But now, alas, the companies realize that  too much of a good thing, has turned into a real problem. Too much production and consequent rock bottom, low prices certainly benefit consumers. However, drastically low prices mean that many companies are no longer profitable, as the price of natural gas in many instances is now lower than the cost of extracting it. This is clearly unsustainable. If this trend continues, many if not most energy companies will go out of business because they are unable to make a profit by selling ultra-cheap gas. For the time being, many simply decided to stop investing in new production. No sense in adding to the existing glut. The excerpt below is from a recent The Wall Street Journal story on the fracking industry:

“Natural-gas prices averaged $2.41 per million British thermal units from April through September, the lowest level in decades, according to consulting firm RBN Energy. Most analysts believe prices will remain low for years.

Bank of America last month lowered its outlook for gas prices in 2020 to $2.35, down from $2.60 and below the price at which drilling is profitable in many regions.

Chesapeake, the shale drilling pioneer co-founded by the late wildcatter Aubrey McClendon, said Tuesday that it plans to slash spending as well as drilling and fracking activity by about 30% next year, resulting in lower natural-gas output.

The Oklahoma City-based company has struggled with hefty debt for years and warned in a securities filing that it may not be able to remain a going concern if it cannot sufficiently reduce its leverage to comply with a credit agreement. Chesapeake’s shares plunged more than 40% to 91 cents in the two days following its disclosure.

Chief Financial Officer Nick Dell’Osso Jr. told investors that the company aims to reduce its debt but could ask its bank group for a waiver.”

The Wall Street Journal, Frackers Prepare to Pull Back, Exacerbating a Slowdown in U.S. Oil Growth, Shale companies change course as financial pressure mounts, November 11, 2019