Until recently, the majority of the nation’s natural gas came from traditional wells in and around the Gulf of Mexico.
Annually, hurricanes and tropical storms have the capacity to create major disruptions in gas price and supply.
However in 2011, natural gas production from conventional sources in and around the Gulf of Mexico was finally surpassed by deep shale plays in states across the country.
MARKETS RESPOND TO FORCES OF NATURE
Severe weather events in the Gulf region affect supply and prices in two ways.
First, in anticipation of a storm, offshore platforms are shut down, crews secure and evacuate the facility and don’t return until the weather event has dissipated.
A minimum of two weeks is lost during this process. We saw this in the wake of Hurricane Katrina and Rita, the Class 5 storms that one-two punched U.S. natural gas prices in 2005.
According to the U.S. Energy Information Association, more than 800 platforms were evacuated in the Gulf during Hurricane Katrina. In the case of Hurricane Rita, all 4,000 platforms were evacuated. Additionally, onshore wells in the Gulf region were secured and evacuated in preparation for the hurricanes.
Second, damage to the processing and gathering infrastructure has a lasting impact on the market. During Katrina and Rita, 111 Gulf platforms were destroyed, and this number doesn’t address the damage sustained by gas processors, pipelines and on-shore storage facilities.
In response to these two hurricanes, gas prices jumped from $8/mmbtu (million metric British Thermal Units) in August 2005 to over $12/mmbtu in October. A year later, the price had fallen below $6/mmbtu.
FRACKING AND SHALE PRODUCTION STABILIZES THE MARKET
The year 2011 was the first in which natural gas shale production across the nation surpassed that of conventional withdraws. Despite environmental opposition, modern horizontal fracking technologies have insulated end-users from Mother Nature’s wrath, with historically low and stable prices as a result.
States that historically had limited capacity to withdraw natural gas from conventional wells have found a sustainable opportunity with horizontal fracking. Additionally, states that were limited to conventional means of production in the past have expanded their output through fracking.
This phenomenon is most evident in the Marcellus shale region in the Northeast, the Haynesville and Eagle Ford regions in the South and the Bakken region in the Midwest.
However, shale production and exploration have popped up in other areas as well, such as California and Florida. Other states – such as New York – are on the brink, pending state legislation.
For the first time, more gas is coming from shale deposits across the country than conventional wells in the Gulf region. This means less fluctuation in supply – and more dependable gas prices in the years to come. With such stability, lifetime cost projections in heating and process equipment investments are more predictable than they were in the past.
POTENTIAL INCREASES IN DEMAND
There are a few demand considerations that could provide headwinds to price stability in the future. The most likely scenario, seen last spring and summer, is the increased demand by electric utilities for natural gas-fired generation versus coal.
While natural gas prices were cheaper than coal, the percentage of natural gas used for electric generation increased from just over 26 percent in January 2012 to just below 33 percent in April 2012.
In contrast, coal’s percentage of electric generation fell from 38 percent in January 2012 to just below 33 percent in April. This was the first time the EIA had reported equal generation usage for both fuels since it began compiling the statistics.
Additionally, if technology, investments and government regulations evolve to readily export natural gas, it could become an extremely valuable commodity on the international market. Now, the exportation and transportation of natural gas via liquefied natural gas terminals are costly and mired in red tape.
Even further down the road, a push to use compressed natural gas for domestic transportation (mainly fleets) would have the potential to increase demand and prices.
Considering none of these scenarios would occur overnight, supply should have plenty of time to meet the higher demand. Natural gas reserves in the U.S. are vast, and all signs point to sustained affordability in the near future.
Tod Sherman is president and CEO of Tybec Energy, an independent energy solutions company that has more than 70 years’ combined experience working with and for natural gas and electricity providers. Based in Lititz, Tybec serves the Mid-Atlantic region, and its website is www.tybecenergy.com.