If there is any fossil fuel that we love as much as our gasoline, it is natural gas. For many, it heats our homes, cooks our food, warms our bathwater and dries our clothes. It is always there at the turn of a knob or a touch of a switch and few have any idea how it gets here or whether it might run out some day. Actually commodities like natural gas don’t run out, they just get more and more expensive.
About 10 years ago there was much concern that America was indeed going to run short on natural gas.
Our domestic gas fields were depleting and the prospects for Canadian gas did not look much better, so a considerable effort was made to build facilities that would gasify the very cold liquefied natural gas (LNG) that was imported from abroad so it could be injected into the U.S.’s domestic natural gas distribution network.
Before the LNG import program really got off the ground, however, fracking came into vogue in the US and US natural gas production took off. This jump in production led to such a decline in natural gas prices that many analysts believe that “fracked” gas costs more to produce than it can be sold for — but so long as investors could be found, natural gas production just grew and grew – going from about 3 billion cubic feet per day in 2006 to some 32 billion last year.
The great increase in natural gas production soon led to calls to start liquefying and exporting the gas, which until recently was selling for about $3 per million BTUs in the U.S. and six times that much in Asia. If producers could get world prices for at least some of their production then they could start making a profit on all these fracked wells they were drilling. Washington responded to the calls to start exporting our surplus gas and several facilities to convert the gas into LNG are already under construction or have been approved.
Before getting into what may be a period of uncertainty ahead, a few words about how the natural gas industry works in the U.S. First we are currently consuming about 26 trillion cubic feet each year. The four major consumer groups for gas are residences, commercial establishments, industrial facilities, and electric power plants.
While our industrial consumption of 7 trillion cubic feet per year is fairly stable throughout the year, the 19 trillion cubic feet consumed by residences, commercial buildings, and power plants varies considerably depending on the season and average temperatures. To allow for the great variation in usage between bitterly cold winter days and mild spring and autumn ones, the U.S. natural gas industry keeps some 2 to 3 trillion cubic feet of natural gas stored in 400 underground caverns to smooth out the supply. When there is a surplus of gas being produced or imported, usually between April and October, gas is injected into these caverns raising the stockpile to 3-4 trillion cubic feet just before winter sets in.
When the demand for commercial and residential heating increases, usually in November, gas is pulled from the storage caverns to supplement what is being produced and we can all stay warm. This of course varies with how cold the winter is. A couple of years ago the winter was so warm that our storage caverns were setting records for the amount of gas they contained.
This winter, however, a shift in the polar jet stream let great masses of frigid air pour down from the North Pole across the U.S.; the demand for natural gas began to set records; and the natural gas stockpiles plunged. From 3.8 trillion cubic feet of useable natural gas in storage, our stocks are now about 1.2 trillion. The situation in the eastern part of the country is worse than for the nation as a whole with stocks now down to less than 600 billion cubic feet and the winter not yet over.
Currently the forecasters are saying that it is unlikely we will see another record breaking arctic blast this winter, but even if spring comes, we will still draw gas from our storage caverns for at least another three or four weeks to keep warm. By April when supply once again outpaces demand and injections into storage begin, we should be in pretty good shape. The key question is that with our stocks at such low levels, can we build them back to 3.8 trillion cubic feet or so before November and the next heating season begins. If next winter is anything like the winter of 2013-2014, then shortages of natural gas and much higher prices can be expected.
There is still more this story however. As I mentioned before, unless the people who are doing the drilling and fracking for shale gas can find gas that contains a large amount of natural gas liquids which sell for a lot more than “dry” natural gas, they are in many cases losing money. As we all know, fracked natural gas wells go dry very quickly. One investment bank estimates that U.S. natural gas production is declining on the order of 24 percent each year, and that we need to drill and frack about 6 trillion cubic feet worth of new wells each year just to keep production even.
We have now had four months of very cold, snowy weather which has not been exactly conducive to drilling and fracking new gas wells. Our gas well drillers have a lot to do in the seven months before next winter sets in. All this is starting to look as if further increases in natural gas production, at least at the extremely cheap prices we have been enjoying for the last five years, may be coming to an end.
It is too early to panic, but a lot of signs point to troubles ahead.