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Page added on January 26, 2012

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How a gas boom became a glut

Production

Passengers on Pennsylvania’s natural-gas roller coaster are advised to check their restraining devices. It’s poised to change course again, producing nausea for some and shrieks of joy for others.

A combination of powerful forces – Mother Nature and supply and demand – is going to have at least a short-term impact on natural-gas drilling in the state. Low prices, full storage facilities, reduced use due to a mild winter, and slow-to-rebound industrial demand will likely slow down the industry for at least a year, and more likely longer. The state and the nation are reaching a temporary plateau in the natural-gas boom, with consequences both positive and negative.

What happened? And what’s next?

Supply is the leading factor. The shale-gas revolution has outpaced production estimates from just two years ago.

In 2008, Pennsylvania had to import 75 percent of the natural gas it needed each year. The commonwealth was expected to be supplying all its own gas by 2009 and to become an exporter by 2014. But it actually reached that point last year.

At the same time, drilling in other shale formations around the country is also producing immense volumes of gas, adding to the glut.

Demand, meanwhile, remains relatively low. A mild winter gets the short-term blame. Low demand from manufacturing and related gas-intensive industries is having a more sustained impact.

Natural-gas users, of course, are reaping the benefits of prices that have not been this low since 1999. The cost of heating an average home with gas this winter is expected to be about $700, a figure that will likely drop further if the moderate weather continues. This allows people and businesses to save money and spend it elsewhere in the economy.

Though good in that sense, low natural-gas prices are bad for producers, many of whom can’t continue to spend money on wells that aren’t profitable under current and foreseeable conditions. In the coming months, Pennsylvanians can expect to see fewer Marcellus Shale natural-gas wells drilled, along with a decline in the conventional natural-gas wells that have dotted the state’s western counties for decades.

With prices for crude oil around $100 a barrel, conventional producers can be expected to focus on shallow, oil-bearing geologic formations. Horizontal drilling in unconventional formations, meanwhile, will likely move west into Ohio to focus on the Utica Shale formation, which also produces more profitable liquid fuels. Drilling rigs here may be idled or sent to other parts of the country with similarly oil-rich shale formations to wait out the glut, taking with them some of the workers who have migrated here in recent years. The trend could be exacerbated by new fees and regulatory hurdles in Pennsylvania.

These developments have the advantage of allowing the state’s educational institutions to train more students and workers for the jobs that will return when natural-gas prices increase. Pipeline and infrastructure construction, which has not kept pace with drilling activity, would also have a chance to catch up.

Given the evidence that natural gas will be available and affordable for many years, more consumers may take the opportunity to convert to the fuel. Conversions of buses, vehicle fleets, and other cars and trucks to compressed natural gas are already picking up considerable momentum. So are permitting and construction of facilities that can use gas to produce the chemical building blocks for auto parts, fertilizers, plastics, and other consumer goods. These plants will take years to build, and they will put thousands of people to work in the process.

As recently as 2007, the price of natural gas was as high as $14 per 1,000 cubic feet, which had terrible repercussions for energy markets and the economy. Prices as low as $2 per 1,000 cubic feet – or, worse, the $1 level some are predicting – are as disruptive, though with different winners and losers.

The development of the Marcellus and Utica shale formations, however, will proceed over a long period, and the volatility of supply, demand, and prices will lessen as time goes on. With that stabilization will come equally stable, long-term economic benefits for Pennsylvania.

Philly



2 Comments on "How a gas boom became a glut"

  1. DC on Fri, 27th Jan 2012 1:25 am 

    The glut is at best, a transient condition, at worst, outright fraud. The ‘glut’ only exists b/c A) the consumption and debt economy is in toruble, and B) Warm winters, thanks to our massive use of fossil-fuels, means less need for NG heating.

    There..

  2. BillT on Fri, 27th Jan 2012 10:24 am 

    No mention of the court battles that are beginning in PA and other locations that may pull the plug on the hoopla soon. But, what do you expect from the Natural Gas pimps that are pushing the idea to dumb investors who are losing their shirt at less than $4 gas.

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