A natural gas bubble

Our energy woes are behind us say the folks vested in the natural gas industry. Increased natural gas supply resulting from fracking has been the biggest energy story of the last ten years.
Gas prices have been low, certainly good news for home heating bills and for industries that use gas for process or heating. Utilities are converting power plants from coal to gas, providing a small dose of good news for the environment. We read stories of a 100-year supply of natural gas for the country and of the U.S. becoming the Saudi Arabia of natural gas.
A look below the surface of the natural gas boom, however, reveals bubble like tendencies and raises questions about whether the current conditions are sustainable. As the expansion of drilling and fracking evolved, a frenzy of trading in mineral rights ensued. A great deal of money has been made by people purchasing these rights, then bundling, flipping, and flipping again, in a pattern reminiscent of activity in the housing market prior to the 2008 crash.
Gas leases are written with a “use it or lose it” provision that requires wells to be drilled and royalties paid within five years. As a result, drilling and fracking activity has exploded with several consequences:
  • An overproduction of gas.
  • Market price of gas being driven down to less than the cost of production.
  • Hype about the abundance of this resource intensifying.
  • More industries and utilities moving from coal to gas as a primary energy source.
More recently, better data has started to emerge from new gas wells which are seeing a production decline much faster than had been anticipated. Also the “sweet spots”, gas rich areas of the individual fields, have been drilled out and new wells are being drilled into the more marginal areas. Production from the largest gas field in the country, the Haynesville in Texas and Louisiana has already peaked and is now in decline. Drilling new wells into shale gas formations has also declined dramatically in many parts of the country.
Laws of supply and demand are not easily broken. Demand for gas has increased and at the same time production issues are beginning to emerge. Inevitably, there is an upward pressure on gas prices. We have already seen a rather substantial wholesale price increase over the last several months. Going forward, the trend toward higher gas prices will continue, the move from coal to gas will slow or even reverse, and the rosy glow will go off our long term energy outlook.
All of this plays out against intensifying environmental concerns about the entire fracking process. Natural gas is a fossil fuel which produces carbon dioxide when burned, and is the primary driver of climate change. Drilling and fracking creates a whole series of environmental hazards crying out for attention and action — that is a subject for another story for another time. For now we need to recognize that natural gas is not the final solution that is going to carry us for the next hundred years.

Muscatine Journal Column 3/15/14