Natural gas industry faces plummet in price

As Americans struggle with climbing costs at the gas pump, the natural gas industry faces a crisis of its own: prices are too low.

The drilling boom that began nearly five years ago is finally being slowed by decreasing values, as a glut on the market has major firms rethinking their long-term strategies and scaling back operations in places like the Marcellus Shale region, thought to be one of the richest natural gas deposits in the world.

In 2008, natural gas costs hovered around $8 per thousand cubic feet. As more and more rigs went up in Pennsylvania, West Virginia and elsewhere over the next few years, the price began its decline to the current 10-year low.

On Thursday, the price per thousand cubic feet was $2.58 - less than one-third what it had been.

The low figures have led to the highest stockpiles in nearly 30 years, with excess gas packing underground storage facilities all across the nation. The Energy Information Administration now says current supplies are more than 40 percent higher than the five-year average. The agency predicts that, by the end of March, almost 2.1 trillion cubic feet of natural gas will be in storage, the most since 1983 and about what the U.S. uses per month.

Bargain-basement prices are one factor, while “warmer-than-normal temperatures this winter that reduced gas heating demand” have also played a role, the EIA said in a recent report.

Convinced prices will remain low for at least the remainder of 2012, energy companies are now looking to other fuels for money-making opportunities.

“Right now, companies are saying, ’Are we going to invest in producing natural gas right now, or are we going to target other things?’ ” said Daniel Kish, senior vice president of policy at the Institute for Energy Research. “If you’ve got a chance to drill for natural gas that would get you $15 a barrel, or you have the chance to drill for what will get you $100 a barrel, you don’t have to have a masters degree to know that you’ll target the liquids.”

Over the past few months, leaders in the natural gas industry have announced they’ll scale back in areas like the Marcellus Shale, turning their attention instead to oil and more valuable “wet” gas.

Last month, Chesapeake Energy, one of the largest players in the business, announced plans to slash daily natural gas production by 500 million cubic feet this year, an 8 percent drop from previous levels.

The company said it may go even further, predicting “flat or lower total natural gas production in the U.S. in 2012” as supply continues to outpace demand by a wide margin.

Other firms are taking a similar tack. Consol Energy, which operates more than 12,500 oil and gas wells and owns more than 4 billion tons of coal in Pennsylvania, Ohio, West Virginia and elsewhere, announced last month it’s cutting investment in the Marcellus Shale by $130 million and will delay plans to drill 23 new gas wells in the region.

Talisman Energy Inc., a company that deals primarily in North America and Southeast Asia, said recently that it, too, will focus investment this year on oil.

“In setting our plans for 2012, our expectation is that North American gas prices will remain low,” company President John A. Manzoni said in a statement. “We will reduce exploration and development from approximately $4.5 billion to around $4 billion, with 80 percent of this investment directed towards liquids-rich opportunities.”

Range Resources, which dominates gas-rich western Pennsylvania, is also cutting investment in the “dry” gas areas of the Marcellus Shale and shifting some of its focus to liquid fossil fuels.

But many in the industry, used to seeing wild price fluctuations during times of economic turmoil, natural disaster or excess supply, still see the future of the U.S. natural gas market as bright as ever.

“Enormous benefits tied to American natural gas continue to be realized,” said Travis Windle, spokesman for the Marcellus Shale Coalition, a fraternity of drilling companies. “Struggling consumers are seeing lower and more stable electricity rates, literally tens of thousands of new jobs have been created, and our nation’s energy security has been dramatically bolstered at the same time.”

One way to keep the natural gas market vibrant, those analysts say, is to find more uses for the fuel in, for example, the automobile sector.

Right now, only about 3 percent of the transportation sector relies on natural gas, with the primary holdup being the chicken-or-egg problem of who makes the first move: Will manufacturers start by making cars that run on natural gas, or will the service station sector start by providing natural gas as widely and easily as gasoline.

“I think it’s something doable. The technology is there. It’s not wishing on technology. The challenge will be infrastructure and cost,” John Felmy, chief economist with the American Petroleum Institute, told reporters in a conference call earlier this week.