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Is There Such a Thing as Too Much [Natural] Gas?

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The discoveries of shale gas in the U.S. and the increasingly efficient methods for releasing it and pumping it out of the ground have revolutionized the energy market in this country. Of the natural gas consumed in the U.S. in 2011, about 95% was produced domestically. What does this mean? The supply of natural gas isn’t as dependent on foreign producers as the supply of crude oil is, and the delivery system is less subject to interruption. The availability of large quantities of shale gas should enable the U.S. to consume a predominantly domestic supply of gas for many years and actually produce more natural gas than it consumes.

The U.S. Energy Information Administration (EIA) projects U.S. natural gas production to increase from 23 trillion cubic feet in 2011 to 33.1 trillion cubic feet in 2040 - a 44% increase. Almost all of this increase in domestic natural gas production is due to projected growth in shale gas production, which is expected to grow from 7.8 trillion cubic feet in 2011 to 16.7 trillion cubic feet in 2040.

In the past, the number of gas wells (rig count) was a good indicator of gas production, and an important factor in determining the future price of gas. However, rig count is becoming an increasingly less important factor as 1) gas wells become more efficient 2) the presence and viability of associated gas is produced from oil wells 3) and the number of capped wells, or wells that are not being used, increases.

The concept of building a well and then not using it may seem confusing. There are two main reasons a company may expend the time and money to build a well and then cap it.

1) Companies drilling for shale gas try to exploit as much of the gas deposits found by tapping into these gas plays and building wells. But all of these new wells may not be connected to a gas pipeline to move the gas from the field to a storage facility. The wells sit idle, waiting to be used in the future once the gas transportation infrastructure is built.

2) A gas well may be capped due to the price of gas. Because of the abundance of natural gas, especially shale gas, the price of natural gas is very low right now, sometimes lower than what it costs to produce it. A natural gas company may cap a well now, and wait out price movement, hoping that gas prices will increase enough to make gas production at that well profitable once again.

So, is there such a thing as too much gas? The short answer: no. But timing is everything, and sometimes it pays to wait for the just the right time. Also, prices could rise in the long-term due to growing demand via exports, increased manufacturing due to low domestic energy prices, an improving economy, and coal plant retirements as a result of EPA regulations that should result in more gas-fired power generation. But the IF’s and WHEN’s of such price increases are very uncertain.

Posted: July 24, 2013