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Sluggish demand, low prices, weigh on US shale-gas developers – AGA

US markets struggle with high natural gas reserves, pushing down prices

US MARKETS for natural gas have yet to adjust to the new abundance of reserves, leaving prices languishing in a range that could soon hit drilling activity. Shale-gas developers may be forced to rethink their plans, a senior analyst at the American Gas Association (AGA) said yesterday.

The sudden transformation in the supply outlook – from perceptions of dwindling reserves in 2008 to the potential for decades of supply – has left the industry in a “state of shock”, Christopher McGill, managing director of policy analysis at the AGA told the World Shale Gas conference in Dallas.

Buyers have yet to catch up with the changes on the supply side. Consuming markets that have made decisions in the past based on the assumption that gas supplies were diminishing are struggling to trust and make long-term commitments based on the revised supply situation, McGill said.

It’s a paradigm shift, he suggested. From plans just two year ago to build 54 liquefied natural gas import terminals in the US, infrastructure seen as critical to filling an imminent supply gap, shale-gas drilling has opened up vast new domestic gas deposits. “Now they say we have enough natural gas to last a century,” McGill noted.

About one-quarter of the country’s shale-gas reserves are considered economically recoverable with present technology. “As late as 2007, the National Gas Council said only 3% was recoverable,” McGill said.

New output has also made the US’ energy supply more secure, he added. Enough natural gas was produced to offset the impact of inclement weather on the energy industry, McGill said. Two hurricanes in 2005 took 80% of offshore production offline, causing gas prices to triple. “The only thing that kept gas prices from going through the roof was the mild winter,” McGill reported.

Two hurricanes in 2008 had the same negative impact on output, but gas prices dropped, because, by that time, the industry had replaced offshore production with new onshore supply, McGill said. “This means we are now secure from hurricanes in terms of impacts on gas markets,” he added.

McGill cited another reason for the popularity of the shale-gas plays. “One of the beauties of the big shale bases is they align with existing infrastructure,” he explained. In addition, he added, the massive Marcellus Shale play is in the middle of the populated northeast market.

Meanwhile, the pace of producing unconventional reserves has continued to pick up. Although the rig count started dropping in 2008, as producers responded to a gas glut caused by the credit crunch and global economic meltdown, the number of horizontal rigs required to exploit shale plays has increased 40% in the last two years.

But the pace of production could slow because the gas glut has kept prices in the $3-4/’000 cf range, prompting some shale gas producers to redirect their resources.

The need to retain leases and the value of natural gas liquids being produced from the shale plays have kept drilling from slowing down so far, but unless prices go up, that will change, McGill concluded.


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