By George Harvey
Gas in Storage.The blue line show supplies in recent months. The green line shows average supplies over the past five years. The gray area shows the minimum and maximum over a five year period. Source: Energy Information Administration
As many consumers might tell you, the price of natural gas is high. This may come as a surprise to many people, who seem to think that fracking made an almost endless supply easily available. Nevertheless, while the promise of abundant supplies created an increased demand, that promise has not been kept.
The gas market is complicated by an annual trend based on weather. Natural gas does not flow directly from the gas field to the consumer. During low demand times, when the weather is warm, gas production exceeds supply, and the excess is stored. In the winter, when gas is used as fuel, the stored inventory supplies the demand production cannot meet. The storage inventory level is lowest in early spring. Production is more or less constant, and as springtime demand declines, production finally catches up.
There are also changes in the gas supply from year to year. Natural gas production peaked in about 1972 in the United States. It declined until about 1985, when increased demand made it profitable to explore for more. The increase was sluggish, however, and production again began to decline until about 2005, when the word got out that fracking would release huge supplies, which would cause the price to stay low. This proved to be an exaggeration, at the least.
There was a large initial increase in natural gas supplies due to fracking, but many of the fields had production peaks sooner than anticipated. The result was that increases in production of natural gas were not as great as expected. In the US, for example, the increase for 2012 was only 1%, and one reason for this was certainly a large decline in the output of major fields, including Haynesville, which includes much of Louisiana, along with parts of Arkansas and Texas.
Meanwhile, natural gas is being used to fuel the turn away from coal. Natural gas plants are being built in increasing numbers, and so demand is up and is expected to grow quickly. In addition, the cold winter has increased demand for heat.
As a result, inventories of natural gas in the US in the middle of March were at their lowest level since 2005. They were, in fact, down to roughly half of what they had been in March of 2013. In fact, they were so low that analysts said a single long cold snap would have caused them to go to zero by the end of the month.
Though inventories were set to start rebuilding soon after that, gas users should not consider themselves off the hook. The inventories are not expected to increase in 2014 to a typical high level, prices are not expected to drop much, and we are likely to go into a new heating season with lower inventories than we went into this one. Another cold winter could overtax the system, leaving some customers with insufficient supplies.
Other factors might produce effects on the supply of fracked gas in the future. One is that environmental problems might lead to rapid decline in the supply. Fracking is being blamed for methane leaking into the atmosphere, increasing global warming emissions. It leaks into aquifers, and many of us are familiar with pictures of water taps gurgling gas that can be lighted with a match. Some communities are being hit with earthquakes on an unprecedented scale; Azle, Texas had five earthquakes in January alone. Wastewater from fracking can also be a problem, as can high water usage. Such problems can mean that laws regulating fracking, and its supply of gas, are likely to be passed, with probable effects on production.
Another problem is that we do not have enough experience to know whether fracking is a solution to the natural gas problem beyond the short term. Declining production and high costs of fracking have not been kind to the companies engaging in the practice. Chesapeake Energy, the second largest gas fracking company in the US has gone through an extended period of difficulties over the last few years, including a layoff of 16% of the workforce. We might surmise that fracking may prove not to be a boon to the gas industry after all.
The analysts we see are predicting a slow rise in gas prices this year. This, they say, will be followed by steeper rises after that.
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