Natural Gas Continues to Get Cheaper

Explosive growth in gas production from shale gas reservoirs and a relatively mild winter has led to a collapse in natural gas prices over the past year. On April 11th the price per MMBTU fell below 2$ sparking debate over how depressed gas prices will effect US industry in the months and years to come. Many believe natural gas will largely displace coal in new domestic power plant construction. The EPA certainly seems to think so. A new carbon pollution standard released by the EPA March 27th will effectively require new coal burning power plants to install frightfully expensive carbon capture units. Should gas prices stay low it will be difficult for coal to stay competitive in light of these new expenses. In fact the EPA goes so far as to posit no new coal burning power plants will be built in cost estimates linked to the new carbon standards. (1)

At the same time these new gas prices are serving as a catalyst for the compressed natural gas automotive industry. Chrysler, GMC and Ford are all developing natural gas vehicles. But the industry is still in its infancy and with only 400 CNG stations nationwide, significant investment in infrastructure is still needed before large scale use of such vehicles becomes practical. (2)

With production high and use unexpectedly low due to the mild weather, underground storage is unusually full for this time of year. Some estimates suggest such storage could fill completely this summer when production typically far outstrips demand. (3) In the long term natural gas exports will likely balance domestic storage and bluster prices. Internationally natural gas sells for close to 14$/MMBTU or some 7 times greater than its current price in the US. LNG plants are currently under construction to facilitate overseas transit but the infrastructure for large scale natural gas exports will take significant time to build. For the interim prices are expected to stay low. Goldman Sachs estimates natural gas will stay depressed for the rest of the year then rebound somewhat to 4$/MMBTU at some point in 2013 as low prices suppress new gas production. (4)

1. http://online.wsj.com/article/SB10001424052702304356604577339703395615194.html?KEYWORDS=natural+gas
2. http://life.nationalpost.com/2012/03/28/cheap-natural-gas-makes-inroads-as-u-s-vehicle-fuel/
3. http://seekingalpha.com/article/478171-natural-gas-storage-is-filling-up-paa-natural-gas-storage-should-benefit
4. http://blogs.wsj.com/marketbeat/2012/04/12/goldman-sachs-natural-gas-prices-wont-rebound-until-2013/?KEYWORDS=natural+gas

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One response to “Natural Gas Continues to Get Cheaper

  1. Natural gas extracted using hydraulic fracturing is a significant percentage (about 25%) of the overall supply of natural gas in the market. Also, shale gas production in the US rose from 1293BCF in 2007 to 3110BCF in 2009. This has also been one of reasons the supply has increased that has led to reduction in prices. It will be interesting to see how the industry will be affected by President Obama’s executive order that has mandated 9 federal agencies to co-ordinate studies on hydraulic fracturing. I suspect EPA will come up with more restrictions to safeguard drinking water that will drive the prices up a little bit. In addition to these water related regulations, one of federal agencies will also come up with best practices for the industry to avoid leakages of natural gas during extraction. Nevertheless, I do agree that prices are going to be low and will displace coal in the short term.
    http://www.politico.com/news/stories/0412/75108.html
    http://www.standupamericaus.org/big-government/the-green-house-executive-order-for-fracking-task-force/
    http://www.eia.gov/dnav/ng/ng_prod_shalegas_s1_a.htm

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