As natural gas prices
continue to drop, the recent US
boom in drilling is slowing. Drillers don't make money if prices go too low -
and drilling wells isn't cheap.
"It is safe to say that there will be fewer natural gas wells drilled
in 2012," said Kathryn Klaber, president of the Marcellus Shale Coalition,
an industry group based in Pennsylvania.
In recent weeks, several companies have announced plans to cut gas
production around the US,
but experts say the low prices are also opening up new markets.
When the shale drilling boom was starting in 2008 the average price for a
unit of gas was about US$8. Two years ago it was down to $5.50, and now it's
dropped to about $2.50. Part of the reason is that the shale gas formations
became productive more rapidly than expected, as thousands of new wells have
been drilled nationwide.
Industry reports note that the national count of active new gas drilling
rigs fell to 775 in early February, down from about 1,500 in 2008.
Yet Klaber said that the low prices create opportunities for more people and
industries to use the product. For example, some drilling companies are
focusing more on the so-called "wet gas" that sells for a higher
price because it can be transformed by refineries into consumer products such
as plastics and fertilizer.
Last month, Chesapeake Energy of Oklahoma City said it is reducing the
number of new dry gas drilling rigs from 47 to 24 this year. In addition, it
immediately cut existing production by about 500 million cubic feet (14.16
million cubic meters) per day, adding that if low prices persist, it may double
the cut, to 1 billion cubic feet (30 million cubic meters) per day.
The company said that about 85 percent of its nationwide drilling
expenditures this year will be toward the more profitable wet gas.
A spokesman for Chesapeake
didn't respond to a request for comment.
Experts say the companies have ways to cushion the low prices. It's called
hedging, and business people have used such tools for hundreds if not thousands
of years, said Sara Moeller, a professor of business at the University of Pittsburgh.
"When you put a hedge on, you're locking in one of your prices, because
you're happy with that price," said Moeller, who has also worked as a
commodities trader.
For example, Houston-based Cabot Oil & Gas Corp. said last month that it
received $5.17 per thousand cubic feet of natural gas on some hedged deliveries
in the final quarter of 2011. Yet the market price at the time was $3.18 per
thousand cubic feet.
Moeller said such deals are possible because large consumers of commodities
also want to reduce price swings, such as utility companies. Locking in prices
limits their exposure to sudden jumps.
It's done by a simple, registered trade on stock exchanges. People
essentially buy and sell the hedges, setting varying prices for different
points in the future.
Klaber said the record-low prices have "caused every company to
evaluate their business model. A well that may have been profitable to drill
last year, this year won't be profitable."
A government report issued last week predicted that at the end of March, the
amount of natural gas that companies are storing is expected to be the highest
since 1983. Those unsold reserves could push prices even further down.
But she noted that the drilling companies are just one part of the industry.
"What may be tighter times for the producers becomes incredibly
positive for all the other people in the supply chain," she said.
She said that means a big piece of the puzzle on long-term trends is how
quickly consumers, power plants and refineries increase their use of natural
gas.
And while oil and gas companies now how to use hedging to smooth price
drops, that tool doesn't work forever, noted Jay Apt, a professor of technology
at Carnegie Mellon.
"It doesn't necessarily fix your cost" over the long term, he
noted, but gives a range of price options. If the boom in natural gas supply
collides with a surge in demand perhaps from power plants looking to take
advantage of the low prices of the cleaner-burning fuel, he said price
volatility could return.
"Then we could be in for a wild ride," Apt said, because the
higher prices might encourage companies to increase drilling again. (nvn)
