Natural Gas Prices Flounder as Inventories Rise
Working natural gas in storage increased by 67 billion cubic feet in the week ended August 23 to 3,130 Bcf, according to the latest report from the U.S. Energy Information Administration. This is down by 235 Bcf from the same period last year but is still 45 Bcf above the five-year average for this time of year.
The data show the trend has developed over the past few years. Inventories have been on the rise as domestic production increases, largely thanks to advances in horizontal drilling and hydraulic fracturing technology. These advances have helped catalyze what some consider a revolution in energy production in the U.S. and are rapidly helping make the dream of energy independence come true, Forbes reports. Domestic production supplied the U.S. with 84 percent of its total energy needs in 2012, the highest level since 1991.
Thanks to advances in technology, a case has been built around the idea that net imports of liquid fuels can be eliminated by 2035. More natural gas and petroleum can be recovered from tight oil formations, shale rock, and even offshore sites than was previously feasible. Combined with greater efficiencies, the gap between U.S. energy consumption and production is narrowing and net imports are declining, down from 8.03 Bcf year to date in 2011 to 5.364 Bcf in 2013. The gap between production and consumption is just 0.716 Bcf this year to date.
However, with production and supplies at or near record highs, the availability of natural gas in the U.S. has become both a blessing and a curse. Prices are so low that producers are having a hard time staying profitable. Futures currently sit at $3.567 per mmBtu as of Wednesday, up slightly on the week and from a year ago but still below the $4 to $6 range that is desired.
The spot price for gas is set in the New York futures market and based on trades at a Louisiana collection center known as the Henry Hub. In 2012, during the worst of the glut, the Henry Hub price dropped below $2 per thousand cubic feet. When prices plunged that low, many companies were forced to write down the value of their assets. The discovery that fields thought to be rich in oil were actually less bountiful than expected also hurt.
Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB), which has spent $6.7 billion acquiring North American energy assets since 2009, wrote down the value of its North American holdings by more than $2 billion last quarter. BHP Billiton (NYSE:BHP) said it would cut the value of its Arkansas shale assets by $2.8 billion during a May 14 conference presentation, adding that capital and exploration spending will “decline significantly” in the next few years.
Not only have producers decided to limit drilling in some fields, they have begun to sell disappointing properties at lower prices than acquired and pushed more investment dollars into storage terminals and gas processing plants. In February, Chesapeake Energy (NYSE:CHK) sold half of its oilfield in the Mississippi Lime formation to China Petrochemical for $1.02 billion.