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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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Natural Gas Prices Are Unsustainably Low

Natural Gas Prices Are Unsustainably Low

Every week, the EIA proclaims a new record for natural gas production. But their own forecasts show that the U.S. will be short on supply by October of this year. A price increase is inevitable beginning later in 2016.

Popular Myth vs Reality

The popular myth is that gas production will continue to increase and that prices will remain low for years. In the myth, price has no effect on production. The reality is that price matters and production is down 1.2 billion cubic feet per day (bcfd) since September 2015 (Figure 1).

(Click to enlarge)

Figure 1. U.S. dry gas production. Source: EIA and Labyrinth Consulting Services, Inc. Related: Eagle Ford Struggles, But It’s Still The Sweet Spot

The production increases reported by EIA are year-over-year comparisons that don’t reflect declines during the last 4 months.

Prices have fallen to less than half what they were in early 2014. The average price for the first quarter of 2016 is only $2.25 per MMBTU (Figure 2).

(Click to enlarge)

Figure 2. Henry Hub daily and quarterly average natural gas prices. Source: EIA and Labyrinth Consulting Services, Inc.

Hedges made when prices were in the $5-range carried many companies through falling prices as they continued to produce like there was no tomorrow. Tomorrow has arrived and the hedges are gone.

Over-production in the Marcellus Shale means that producers have to compete for limited pipeline capacity by deeply discounting their sales price. The best core area locations are commercial at $4 per mcf but wellhead prices averaged only $1.75 per mcf in 2015.

No Simple Solution to Falling Supply

There is no simple solution to falling supply. That’s because almost half of U.S. supply is conventional gas and it is in terminal decline. Now, shale gas is also in decline (Figure 3). Related: Gazprom Threatens To Cut Off Gas Supply To Kyrgyzstan

(Click to enlarge)

Figure 3. U.S. conventional and shale gas production. Source: EIA and Labyrinth Consulting Services, Inc.

Conventional gas supply has fallen 16.75 bcfd since July 2008. Until July 2016, increases in shale gas production more than offset those losses.

Conventional gas will continue to decline at about 5 percent per year because few companies are drilling those plays. Shale gas must, therefore, continue to grow by at least 15 bcfd per year just to offset annual conventional gas decline (~2.5 bcfd per year) and legacy shale gas production decline (~12.5 bcfd per year).

It will take 15 bcfd of new shale gas production in 2016 to keep U.S. production flat.

Shale gas production replacement and growth for 2015 were 14.5 bcfd, down from almost 18 bcfd in 2014. It will be difficult to match 14.5 bcfd in 2016 because shale gas production has been falling 0.72 bcfd (~2.2 bcfd annualized) for the last 4 months of data (Figure 4).

(Click to enlarge)

Figure 4. Shale gas production. Source: EIA and Labyrinth Consulting Services, Inc.

The biggest declines since peak production are from the older “legacy” shale gas plays namely, the Barnett, Fayetteville and Haynesville (Table 1).

(Click to enlarge)

Table 1. Summary table of shale gas volume changes since peak production. Source: EIA and Labyrinth Consulting Services, Inc.

Although additional reserves exist in the Barnett and Fayetteville plays, the core areas have been largely developed and marginal areas require substantially higher gas prices to be commercial. There is only one horizontal rig operating in the Barnett and there are none in the Fayetteville.

Production in the Haynesville Shale has decreased by 3.64 bcfd since its peak. High costs and relatively low EURs make the play uneconomic below about $6.50 gas prices. Parts of the core areas remain under-developed at today’s prices.

Marcellus production declined 0.52 mcfd since July 2015. Most of this probably represented intentional shut-ins because of low wellhead prices. Marcellus production can grow but new pipelines are needed to turn reserves into supply. Even with additional infrastructure, production will peak in the next few years just like in the older plays.

Production in the Utica and Woodford plays is increasing but it is largely offset by declining associated gas from the Eagle Ford, Bakken and other tight oil plays.

A Supply Deficit Even In The Optimistic EIA Case

The EIA forecasts that net dry gas production will increase 1.4 bcfd in 2016 and 1.6 bcfd 2017. Even with that optimistic forecast, their data still shows that the U.S. will have a supply deficit beginning in the last quarter of 2016 (Figure 5). A more realistic forecast implies a much greater deficit that begins sooner. Related: Downward Trend For Bakken Oil Production Set To Continue

(Click to enlarge)

Figure 5. U.S. natural gas supply balance and forecast. Source: EIA and Labyrinth Consulting Services, Inc.

A supply deficit does not mean that there won’t be enough gas. There is ample gas presently in storage to cover a supply shortfall for a while. That is what happened during the supply deficit in 2013-2014 (Figure 5). That deficit was created by flat production similar to what EIA predicts for the first 3 quarters of 2016.


What is different this time, however, is that net imports will reach zero in early 2017 because of decreasing imports from Canada and increasing exports. Add to that the challenge of replacing conventional gas depletion, and there is a much more serious supply problem than EIA’s already questionable forecast suggests.

Another big difference is that in 2013-2014, capital was freely available with average oil prices above $90 per barrel and average gas prices more than $4 per MBTU. Today, the oil and gas industry is in financial shambles with both oil and gas prices at very low levels, and it is unlikely that companies can raise the capital necessary to ramp up gas drilling quickly if at all.

Export plans of at least 7 bcfd by 2020 are not helpful considering the challenges of meeting domestic supply in coming years (Figure 6).

(Click to enlarge)

Figure 6. U.S. net natural gas exports. Source: EIA and Labyrinth Consulting Services, Inc.

The prospect of exports increasing to 13 bcfd by 2030 is even more troubling absent some new shale gas play that we don’t know about yet.

Higher Gas Prices Are Inevitable

A few years ago, the oil and gas industry convinced the world that the U.S. had 100 years of natural gas. Some of us cautioned that it is worth reading the fine print, that there is a difference between a resource and a reserve. The harsh light of reality eventually reveals that what seems too good to be true usually is.

The obvious solution to declining gas supply is higher prices.

The EIA’s STEO forecast calls for $3.17 per MMBTU gas prices by December 2016 and for $3.62 by December 2017. Those prices will not support necessary drilling in legacy shale gas plays. EIA’s AEO 2015 reference case does not call for gas prices to reach $5 per MMBTu until 2025. We can’t afford to wait 9 years.

It is, therefore, inevitable that natural gas prices must increase sooner, preferably in the next 12 to 24 months. If oil prices remain low, a shale-gas revival may save the domestic E&P business. During the last supply deficit in 2014, gas prices averaged $4.36 per MMBTu compared to only $2.63 in 2015.

But it will take time for producers to reverse the decline in drilling and production. It may be difficult to raise capital for renewed drilling given the current distress in the oil and gas industry.

Something will have to give sooner than later. That will likely be natural gas exports.

By Art Berman for Oilprice.com:

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  • James Hilden-Minton on February 23 2016 said:
    Natural gas (and coal) will need to be priced under $3/MMBtu and decline 10% per year to remain competitive in the generation market. Wind, solar and batteries are applying substantial price pressure, edging out new capacity and will only accelerate if natural gas price get above $3. No analysis is complete without looking at these competitive pressures.

    At $3/MMBtu, boilers use $31/MWh just for fuel. Meanwhile, wind and solar PPAs are in range of $25 to $45 per MWh with fully loaded cost. Thus, existing gas generators will see utilization decline as renewables are added to the grid. So until gas is priced out of the electricity market, the marginal price in that market will keep natural gas prices low. The rate at which gas loses market share to renewables increases with the price of gas. So any return to high prices will be transitory and result in massive loss of share. Gas producers need to be content with prices under $3.
  • Amvet on February 23 2016 said:

    Exactly how are market prices for oil and NG determined?
    There is massive evidence that gold and silver prices are controlled by massive futures trading by a few giant funds and banks, including central banks.

    Any comments?

    Regards, Amvet
  • Robert Downey on February 24 2016 said:
    Don't agree re cost of natural gas vs solar. Most nat gas gen sets and turbines have heat rates less than 8000, which equals $24/MWh; and likewise there aren't any solar panels on the market that can actually deliver cost below $45/MWh, even at low debt rates. That's why solar and wind are heavily subsidized in order to compete with natural gas and coal. 8800 Btu PRB coal currently sells for $9.55/ton, or $.54/MMBtu, ~$5.50/MWh. Utilities know this; the only reason they are investing in wind and solar is regulatory mandates; they pass the added cost on to their customers. In Colorado electricity rates have gone up since utilities started adding wind and solar to their 20% mandated renewable mix, despite natural gas prices declining during that period.
  • Dirty Lens on January 21 2018 said:
    go to www.airnow.gov and you will study the US map on firewood smoke zones from yellow to purplish brown as the worst . People switch to firewood instead of to gas to promote public health and lower health insurance premiums.. People dont understand the link between firewood smoke and additional doctor visits by whining patients who sucks in firewood smoke and get sick . Or for lack of oxygen indoors as you should know ver well that fires burn up indoor oxygen and lower the oxygen content indoors . This is not healthy for brains! People suffer from oxygen starving brains that lead to unknown results.. Doctors dont know causes of ailments all the times and they just shrugged shoulders.. it is not their jobs. it is my job to inform you that firewood is unhealthy and not renewable in any worst sense because it pollutes air.. It burns up oxygen!

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