Commentary: Time to scrap shale gas ‘game-changer’ myth

Michael Vickerman is program and policy director of RENEW Wisconsin.

Michael Vickerman is program and policy director of RENEW Wisconsin.

By Michael Vickerman

As this latest blast of arctic air slides away from the Upper Midwest, now is a good time to take stock of the conventional wisdom that grips natural gas markets today.

The Energy Information Administration (EIA) last week reported another large weekly withdrawal of natural gas–230 billion cubic feet (bcf)–from underground inventories. While this is a big number, it is well short of the record-setting 287 bcf withdrawal reported two weeks earlier. This week’s report may eclipse that number.

The heavy demand for natural gas this winter leaves inventories at their lowest levels for this time of year since 2004.  Even if temperatures returned to normal this February and March, we could finish the heating season with only one-third the volume in storage back in early November.

In fact, we’re on track to pull 26 trillion cubic feet (tcf) out of storage this heating season, a volume likely to exceed all the natural gas extracted from domestic sources last year (an estimated 25.5 trillion cubic feet).

Remember the extraordinary surplus that accumulated in the winter of 2011-2012? It’s ancient history now. Without a moment’s thought to what was happening, we managed to Hoover through every last cubic foot of ballooning inventories that in 2012 sent gas prices plunging down to levels not seen since 2002. One month into 2014, the pendulum has clearly swung over to the deficit side of the supply-demand equilibrium.

The problem is less a shortage of supply—domestic extraction volumes have risen nearly 50 percent in a mere eight years—than an accelerating “longage” of demand.  Notwithstanding the sluggish economy, baseline consumption is rising, stoked by low commodity prices that discourage conservation efforts and a growing supply of residences and businesses to heat.  Even though power companies scaled back their use of natural gas in 2013, overall gas consumption rose 2 percent from 2012 levels, according to EIA estimates.

Stir into that dynamic the coldest winter in the Upper Midwest this century and spice it with slowing production growth reported last year, and you have all but one of the ingredients needed for a dramatic upward re-pricing of this precious energy resource.

What is the missing ingredient here? A new narrative to combat the “shale gas miracle” myth that has been drummed into every adult American’s brain and belief system, courtesy of a well-financed and expertly orchestrated public relations campaign sponsored by the fossil energy industry.

Most Americans now believe that there is enough recoverable natural gas lurking under our feet to heat and power this country well into the next century. A fairy tale to be sure, but as long as it is one we believe to be true, we will have trouble recognizing the signals that tell us that the supply-demand picture is tightening.

Let’s focus on the supply picture for a moment. Did anyone notice that natural gas extraction volumes rose by only 1 percent in 2013? This was “the lowest annual growth since 2005,” the EIA wrote, noting also that “this production growth was essentially flat when compared to the 5 percent growth in 2012 and the 7 percent growth in 2011.” That modest bump failed to keep pace with EIA’s estimate for increased gas usage last year.

In spite of the recent record-setting withdrawals, the price of natural gas, now around $5.00 per MMBtu, is substantially below the $8.00 threshold that it sold for in January 2008, even though the amount of gas in storage then was 13 percent higher than today’s volumes.

One market analyst who clearly hasn’t noticed the changing picture told Bloomberg reporter Christine Buurma earlier this week that “the U.S. market remains awash in gas,” and dismissed the recent price rally as “transitory and not sustainable.”  This analyst believes that prices could drop back to $4.00, a level widely thought several months ago to represent the price ceiling for this commodity.

Not to be outdone, another market analyst predicted a retreat to $3.00 prices by 2016. How this resurgence of supply can be accomplished when prices are dropping is not explained.

Here we see the power of the shale gas “game-changer” myth. Output growth is slackening and weather-related demand is spiking, yet energy analysts and market commentators still expect 2014’s prices to conform to the pattern set several years ago, when we were truly awash in gas.

While the rock bottom prices of 2012 proved very effective in working supplies back down to normal levels, they have also motivated energy companies to conserve cash, cut their exploration budgets, and squeeze as much product as pssible from known reserves.  Having operated in survival mode since the great gas bubble of 2012, these firms are too cash-strapped to ramp up exploration and extraction activity. What they would need to make that happen is, first and foremost, a return to 2008-level prices.

What is not sustainable for much longer is $4.00 natural gas, especially in light of certain physical and economic realities, such as:

  • Steep decline rates in the output from wells tapping into shale gas released by hydraulic fracturing (“fracking”);
  • Continuing expansion of gas-fired generating capacity substituting for coal and nuclear power plants now being retired; and
  • Accelerating investments in infrastructure to liquefy domestically produced natural gas for export to Europe and Asia, which would bring to bear global pricing pressures on a commodity currently enjoying a substantial discount relative to overseas markets.

On the last point, for a taste of what global pricing pressure can do to a formerly low-cost energy source, observe the supply-demand-pricing dynamic that is now sending Midwest propane markets into gyrations. True, a number of unforeseeable events, some of them weather-related, converged to elevate propane use over the last six months, but in a globalized market, the people who can pay the most for a valuable commodity are often not the ones who need it the most.

Anyone who has ever watched a football game in January knows that subzero temperatures can be a game-changer, too. Perhaps this remarkable stretch of winter weather will be just the thing to pierce through the veil of wishful thinking and comforting fairy tales that undermine our collective ability to face our uncertain energy future, and to make all necessary preparations.

9 thoughts on “Commentary: Time to scrap shale gas ‘game-changer’ myth

  1. I’m honestly not sure what to make of this as the market still seems to consistently think that gas prices (other than occasional, inevitable and temporary cold snap peaking) are going to stay relatively stable over at least the next 8-9 years. The nasty propane situation seems to be a temporary (and painful) aberration where companies did not guess right for the cold weather and supply could not catch up with a spike in demand, not a long term structural supply problem. Yes, it seems the 2012 perfect storm that sent natural gas prices crashing is long gone. Yet despite Henry Hub gas futures prices are pretty darn flat and barely even scratch $5 until 2022.

  2. Mr. Vickerman doesn’t seem to understand that $5 natural gas is still inexpensive energy. Nor does he understand fundamental market economics – had the withdrawals been bigger last winter, the prices would have been higher, and the production bigger.

    How about this? I’m going to predict that production in 2014 will be at least 5% bigger than in 2013. The higher natural gas prices will stimulate more drilling. Is Mr. Vickerman willing to stake his reputation on predicting the opposite? Will he engage in a public bet that 2014 will fail to see a 5% increase?

    I assume the answer is no, he won’t. Which is all the proof you need that this editorial is from a green energy apologist who knows nothing about oil and gas.

  3. The propane “crisis” is teaching us what the gas station “crisis” taught us – as long as we remain dependent on fossil fuels, we are vulnerable to price gouging and eventually, limited supply. We must all look to individual energy independence and we can only achieve that with renewable sources.

  4. Michael makes some very good points but leaves out some significant changes because of the shale gas “game changer”. One is that the drive to retire coal plants and end the construction of new coal plants would have been nigh impossible without significant natural gas availability and price drops.
    The other as noted by comments above is that natural gas is a well established commodity with significant pipeline capacity. Investment in storage and production follows price so when prices get more “normal” for winter/summer investment will increase. We are also seeing natural gas available in parts of the USA never seen before which is greatly reducing dependency on fuel oil and propane which is a good thing for consumers and the environment.

  5. It is evident that $5.00 plus gas prices are high enough to cause some of the idled coal units to be economicaly viable once again. This is not speculation some of these coal plants are currently back on line and others are in the process of returning back to service. This will do doubt cause the green amongst us to choke on their granola.

  6. In my opinion, the article is an attempt to get attention with a fallacious headline. The U.S., in a relatively short period of time, has gone from building LNG terminals to import massive amounts of natural gas, to planning on converting those terminals to export the vast amounts of gas unleashed by fracking.

  7. You forgot one little detail in your analysis…the amount of rigs drilling for natural gas dropped over 50% over the last two years. If volume for 2013 only rose 1%..that is quite an achievement for the drillers. What do you think will happen if we go back to having close to 850 rigs drilling for NG, instead of the 350-380 we have now?

  8. The problem is that Mr. Vickerman is writing about something he does not understand.

    Mr. Vickerman wrote, “In fact, we’re on track to pull 26 trillion cubic feet (tcf) out of storage this heating season, a volume likely to exceed all the natural gas extracted from domestic sources last year (an estimated 25.5 trillion cubic feet).”

    This is false and obviously false to those who follow natural gas. The EIA provides those figures:

    Total natural gas storage has been about 4.6 TCF as reported by the EIA and those figures are credible and what people use to track storage. In the last few years, the total “swing” in storage from the low to the high has been about about 2.5 TCF. So, I wonder if the author misread the 2.5 TCF swing and thought it was 25 TCF?

    His views on shale gas are similar flawed. He does not realize that a few years ago, the US was building many LNG import terminals because our domestic supplies of “conventional” natural gas were declining. That is the gas from conventional reservoirs (not shale or other “tight” reservoirs) are declining. Supplies of conventional natural gas continue to decline but our total production of natural gas has been increasing rapidly every year. Because of the rapid increase, the average price paid for natural gas declined to below $4.00 per mcf. As a comparison, in most countries, they pay $7.00 to $12.00 per mcf. Last year, the price in the US averaged $3.72 and the year before, $2.75. The rest of the world typically paid much more for natural gas. Due to the low prices of natural gas in North America, natural gas drilling has declined substantially but even so, natural gas production increased slightly. Due to this last winter and the higher than expected use of natural gas, prices have been increasing. The higher prices will mean that drilling will also increase (unless blocked by overzealous government regulators) and gas production will continue to rapidly increase. Note, the increases in production are from private land that has in the past not been regulated by the Federal government. Natural gas production continues to decline on land controlled or regulated by the Federal government and is increasing everywhere else.

  9. This is the first intelligent analysis I have seen on the the gas situation and I agree 100% with mr. Vickerman. If you go on the internet there’s not a single word about the 60% of our non-shale gas production, which is delining at close to 10% a year. I have calculated that in 2014 an extra 1.3 trillion cubif feet will have to be supplied just to stay even. Add another 800 billion due to our substandard storage level and there’s no way gas is going back to $ 4.00. All of our shale fields added together except for Marcellus and Utica are also in decline. That loss will have to be made up as well. Add increased industrial demand, and not much demand destruction from coal/gas switching, and Marcellus will have to produce extrodinarily well to get us back on track. Some blieve this source to be infinite, while others claim its close to topping out. I take a middle position on this, but am quite sure there won’t be enough in the tank next winter to keep us out of trouble. Look for 6 + gas everyone. The Old Bullfrog