The Natural Gas Massacre

Wolf Richter's picture

Wolf Richter

Natural gas is dirt cheap, hovering at a 10-year low. In the US, that is. In other parts of the world, natural gas is four, five times more expensive—a rare discrepancy in a globalized economy. In 2011, the US, the largest producer in the world, produced more natural gas than ever before. But, stunningly, there are no facilities to export significant quantities of it (as liquefied natural gas), though there are facilities to import it, which are now used for storage because imports have ground to a halt at the current price differentials.

The low price in the US has all sorts of beneficial consequences—and has become a cornerstone of President Obama’s energy policy. In the "Blueprint" released Monday, the White House touts its initiatives that encourage production and use of natural gas, particularly for transportation. It claims that developing the 100-year supply of shale gas that the US seems to have would “support 600,000 jobs by the end of the decade.”

But there is a problem: price. Natural gas is too cheap. And the low price, ironically, is throwing a monkey wrench into these plans.

The winter of 2010/2011 was harsh, and despite record natural gas production, high demand for gas as a heating fuel saw to it that storage levels fell well below the five-year average. This year, record production met a historically mild winter, and the normally steep draw-down of gas in storage has not occurred. Storage levels are 48% above the five-year average (EIA report). And prices, recently at around $2.28 per MMBtu, are less than half of the already low prices of last year. In fact, gas is so cheap that when it occurs as a byproduct in oil wells, it is often “flared,” that is burned off at the well, because installing the equipment to process and transport it is simply not worth it.

The drilling boom behind this bonanza was triggered by an innovative technology, hydraulic fracturing, that extracts gas trapped in rock deep underground. But fracking, as it’s called, has some issues:

- Drilling these wells is expensive, more expensive conventional wells.

- Gas production at these wells drops off sharply after a few months. After a year, it may be down 75%, and after 18 months, it may be down 90%. To increase production, more money must be invested. The well can be refracked, for example. It will revive it for a few months. But eventually, a new well will have to be drilled nearby, to start the cycle all over again.

A conventional well, after the one-time costs of drilling, produces a near constant flow of gas for many years, which allows the investor to recoup the original investment and make a profit over time. The principle is the same in fracking, but “over time” has a different meaning: months, instead of years. For this to appeal to investors, the price of gas must be high.

But it no longer appeals to investors, and drilling activity is collapsing. In 2008, the peak of the drilling bubble, there were at one point over 1,600 rigs drilling for natural gas in the US. During the financial crisis, the rig count fell off a cliff, then recovered a bit, but now is in free fall again. Last year at this time, there were 882 rigs drilling for gas. Two weeks ago, the count was down to 691. Last week it was down to 670 rigs (Baker Huges).

Fracking has turned into a massacre for producers, and those that can are fleeing—to oil, a highly profitable activity. Others are contractually committed to drilling and producing gas, lest they risk losing their leases.

So these noble ideas of how dirt-cheap natural gas will perform miracles, as ballyhooed by the White House, will smack into reality: at current prices, drilling activity will continue to shrink while production at wells drilled over the last two years is plunging. At some point, the massive amount of gas in storage will be drawn down below a normal level. But production can’t be cranked up from one week to the next. Perceived or real shortages will drive up the price, but not to an equilibrium where producers barely break even and consumers enjoy low-cost energy. It will be a spike. We’ve been through this before.

Meanwhile, Republicans are trying to tar President Obama with gasoline prices that have gone the opposite way. The strategy is working. Obama’s approval rating on handling gas prices has plunged. In San Francisco, gas is already $4.50. Yet across the Bay are five oil refineries that together are the largest exporters of petroleum products in the nation. For this astounding debacle, read.... The Fuel Price Conundrum.

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hussey789's picture

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dumbengineer's picture

This piece fails to explain why US won't increase  exports in  NatGas.

Fedaykinx's picture

a gravel pit?  seriously?  where do you people come up with this shit?

gasmiinder's picture

They get if from the shithole.

"I saw a movie it must be true".  It's been going on for 60 years?  It's never caused a problem? 60 years and tens of thousands of times without ever a documented case of the accused disaster?

Don't give me facts dammit I saw a MOVIE!  Made by a guy who makes MOVIES!  And he gets paid by getting people to watch them - that's all I need baby!

Now shut up while I bitch about how all the manufacturing went oversees where you can actually build a factory without a billion dollars and ten years in permits...........

The Swedish Chef's picture

Apart from being a pecuiliar shortsighted and destructive method (crushing the bedrock will make Pennsylvania a gravel pit) apparently the gas boom suffers from other difficulties. Or should I rather say that this situation points out a critical flaw in the American thinking: that the USA is the centre of the known universe and such goods flow to the USA, not from the USA. 


Which is of course funny, since just a couple of decades ago "Made In USA" was not a rare sight on any type of goods. But today someone seems to have lost it. How on Earth did you think of constructing such a huge apparatus without export capacity? How did the gas industry not see this coming? Well, if you think that grinding down the very ground you stand, live and carry out your whole existance to get the trapped gas is a good idea, well, maybe you are just that stupid.

gasmiinder's picture

IF you think that NG drilling "grinds down the very earth you live on" and creates "a gravel pit" then you really are "just that stupid".

The current oversupply of gas occurs for one reason - there is no "gas industry" that sits down and plans the market (I know that's very hard for your little greenie mind to grasp).  There is in fact a very comptetitive industry that, like all commodities, goes through extreme boom & bust cycles when high prices drive investment and low prices kill it.  This particular cycle has had more egregious investment decisions than most because we live in a time of extreme malinvestment driven by our central bank.  When vast amounts of money flow into an industry based on fraudulent accounting and drives the "price to play" to exorbitant levels then a situation is created where drilling must occur to lock in the ownership of the minerals.  This has driven the oversupply far beyond where it would be normally but the market will solve the problem.

The people who think NG will always be below $4 (now it's below 3 and going lower) are just as wrong as all the morons who poured money into the industry five years ago thinking it would always be above 8.  (Must have been their thinking right?  They were spending money in plays that required $8 to be economic)


AnAnonymous's picture

The US of A is the center of the US world order.

And in US citizen economics, the center is where the consumption takes place.

The rest of the world is organized so that this consumption can happen.

Gamma735's picture

The world was once organized around Rome and the Romian citizens' wants and desires.

The Swedish Chef's picture

The Romans issued gold coins and used slave labor, a far more sustainable solution than the current model. Not that I am in favor of slave labor... But I do like gold coins. 

RoadKill's picture

Clearly anyone recco'ing CHK has never done a 15 year deepdive on the company. Production per share has barely increased over the last 15 years. That's why the shareprice has gone way up and way down, but generally ends up at the same place. Aubry does too many bad deals. Look at the good gas companies and production per share is up at least 10x over the same time period. Hell XTO was a 30 bagger for people that know how to analyze cash recycle ratios

nothing can go wrogn's picture

The only thing I can compare fracking to is a late stage cocaine addict who starts licking the carpet in hopes there are a few specks that might have fallen. When that's not good enough he robs his grandma at gun point stealing her weekly grocery money. Still unable to feed his habit, he burns his grandmas house down with her inside, hoping to collect the insurance money and make a big score. Yep, that's fracking, except fracking involves way nastier chemicals than cocaine production.

Bunga Bunga's picture

But we get cheap gas for the next 20 years. It's worth to spoil the planet for the next 200 years.

HungrySeagull's picture

Shove coal into a furnance pile coke underneath and light it for half a day.

Filter the fumes through water and extract to a holding tank cleaning along the way.

Anything taken out can be reused or resold for other uses.

Kayman's picture

The only free gas is coming from DC.

No. The most expensive gas taxes can buy.

Diamond Jim's picture

cornerstone of Pres Obama's energy policy ?????

 Huh, since when. I thought it was a big NO to hydrocarbons. The only free gas is coming from DC.

Tsar Pointless's picture

It's a good thing many places and people in Western Pennsylvania have thrown theirs and our environmental future down the toilet for a few measly Chairman Ben digi-dollars.


A gas well leak in Wash­ing­ton County likely involved 80 bar­rels of con­den­sate, or wet nat­ural gas, in the soil instead of two bar­rels, the state Depart­ment of Envi­ron­men­tal Pro­tec­tion said on Friday.

Wow! From 2 to 80! That's one hell of a swing-and-a-miss! And you thought the economic news releases we receive in the Fascist States of America were subject to huge revisions.

Drill, baby, drill!

That's a little Tsarcasm for ya!

sun tzu's picture

I'm still waiting for your types to stop using fossil fuels. That's right, you take the bus, so you don't have any use for oil

Buy Saudi oil baby, buy Saudi oil LMFAO!!!

Bunga Bunga's picture

Telecommuting and bicycle. Would work for me very well. But wait, then this whole capitalism thing will collapse. So lets burn the planet down to keep capitalism running. We start with your backyard.

AnAnonymous's picture

Actually, US citizen economics begets that you start with the least able to resist backyard (path of least resistance)

And when the stock of easy to deplete backyards run out (an expected consequence), and when the stuff is closing US citizen backyard, it is all because of the easy to loot backyard owners's fault.

Vint Slugs's picture

Here's a technical opinion updated today from its earlier analysis if you're interested - Post #96 in the thread.

Evil Bugeyes's picture

Assuming 125,000 BTU/gallon for gasoline, then even at $4/MMBTU that would work out to $0.50/gallon.

Did I make a mistake somewhere?

sun tzu's picture

Your mistake is in assuming the price would still be at $4/MMBTU if 100 million cars were running on NG along with half of the nation's power plants. Remember that marginal demand determines prices.

indygo55's picture

How come BO isn't talking up abiotic oil? Could it be that the scam that is "fossil fuel" too important to his campaign?

The Swedish Chef's picture

Perhaps because abiotic oil is the last deperate charge from pesudo-scinentist probably paid off by low level oil companies? 

And even if oil had an "abiotic" origin, is this process churning out 3.5 billion gallons of oil a year? Hardly, huh? So were still screwed.

FeralSerf's picture

Nope, no mistake.  It is possible to produce diesel from it.  The plant is not cheap.

Methane has an  inconveniently low critical point, (-83 °C and 675 psi) so liquid storage is not very practical in most applications.  Compressed NG has its own storage problems, e.g. getting a decent amount of BTUs in a reasonable volume, realistic pressure tank at normal temperatures.  Bottom line -- it needs a bigger space in your car than your gasoline tank occupies to go the same distance.  Refueling needs to be more frequent and is less convenient.  Cost savings may mitigate this.  Many filling stations in Peru, for example, have cheap CNG available.  I think it's popular with the taxis and Peruvians have less money to spend on fuel so they're more likely to forgive some inconveniences that Americans wouldn't tolerate  (yet).

Seasmoke's picture

smartest thing i ever did was switch my oil tank out for NG is 2007.......only cost me $50 !

austin0388's picture

Buying natural gas right now is just as stupid as buying gold at $300 an oz. back in the late 90's  We should all be so lucky to be that stupid.  

Central Bankster's picture

Yah except how are you buying it?  If you're using UNG or /NG its an apples and oranges comparison.

max2205's picture

I'll share. 2.20 to 1.80 some how some time should be a good trading bottom. 20% cheaper than now. 1.50 isn't out of the question on a collapse trade. Toughest trade for the last 4 years. Down 96%. Yikes

OC Money Man's picture

The "lifting cost" of Bakken field light sweet crude oil is $16 a barrel = $58 a gallon of gasoline.  The current lifting cost of Bakken field natural gas is less than $1.50 and falling rapidly as the field is built out.  Obama killed the Keystone XL pipeline because it would have provided transportation for U.S. and Canadian oil and gas that would have savaged the fat crony oil and gas producers and bogus alternative energy suppliers that hose American consumers.  Obama's energy strategy is get big money!  He has an excellent track record of raising big money! 

GovtMediaLiars's picture

My analysis tracks very well with yours. I agree and at this time could not say anything positive about that chart.
Damn glad I never dabbled considering that I almost changed my view some months back.

max2205's picture

Right, what could go wrong buying a basic energy product at 98% off high. (50% above all time low.... Lol). I am seriously looking at a USO short and UNG long if Iran blows oil past 120-150. That should be a fuck you money buy and hold.


Desert Irish's picture

What could go wrong? and demand. 30% of NG is currently coming from by-products of oil drilling predominately shale not dry gas - less than 12% is now currently derived from the Gulf of Mexico so forget hurricane season. Throw in storage and tomorrows possible draw. This could go a lot lower and will. In saying that if you find the bottom and wait 5 years you might see a gain. Both T Boone and Buffet are currently losing their shirts on this trade,,,,,,

John Law Lives's picture

If you want to bet on a NG price rebound, you can do better than UNG.  UNG is a terrible ETF.

One might consider going long on CHK (Chesapeake Energy) before UNG.


Desert Irish's picture

UNG is a widowmaker.........CHK is holding a hell of a lot of debt ($10 billion) when gas prices are predicted to go sub $2, CHK is non hedged.

gasmiinder's picture

You are correct sir.  Only thing keeping CHK going is the apparently inexhaustible supply of foreign companies lined up to be raped in order get a "position" in shale plays that aren't economic (put it to me Aubrey - I can't wait to start losing money too!).  Much better way to play NG prices is to pick up one of the highly NG leveraged MLP's.  You'll get 6-8% dividend yield at current prices while you're waiting for the rebound (which could take longer than you think - but it will come).


Besides that way you avoid being involved with a management team that views shareholders exactly the same way they view potential foreign company partners (competing for the worst corporate governance on Wall Street)

Fedaykinx's picture

ung is a widowmaker in a widowmaker market.


i wouldn't touch chk right now either.

BeetleBailey's picture

ECA...much better NG company