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(Forbes) Every week, the EIA proclaims a new record for natural gas production. But their own forecasts show that the U.S. will be short on supply by October of this year. A price increase is inevitable beginning later in 2016.

Popular Myth vs Reality

The popular myth is that gas production will continue to increase and that prices will remain low for years. In the myth, price has no effect on production. The reality is that price matters and production is down 1.2 bcfd1 since September 2015 (Figure 1). Figure 1. U.S. dry gas production. Source: EIA and Labyrinth Consulting Services, Inc. (Click image to enlarge)

The production increases reported by EIA are year-over-year comparisons that don’t reflect declines during the last 4 months.

Prices have fallen to less than half what they were in early 2014. The average price for the first quarter of 2016 is only $2.25 per MBTU2 (Figure 2). Figure 2. Henry Hub daily and quarterly average natural gas prices. Source: EIA and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

Hedges made when prices were in the $5-range carried many companies through falling prices as they continued to produce like there was no tomorrow. Tomorrow has arrived and the hedges are gone.

Over-production in the Marcellus Shale means that producers have to compete for limited pipeline capacity by deeply discounting their sales price. The best core area locations are commercial at $4 per mcf3 but wellhead prices averaged only $1.75 per mcf in 2015 .

No Simple Solution to Falling Supply There is no simple solution to falling supply. That’s because almost half of U.S. supply is conventional gas and it is in terminal decline. Now, shale gas is also in decline (Figure 3). Figure 3. U.S. conventional and shale gas production. Source: EIA and Labyrinth Consulting Services, Inc.(Click image to enlarge)Conventional gas supply has fallen 16.75 bcfd since July 2008. Until July 2016, increases in shale gas production more than offset those losses.Conventional gas will continue to decline at about 5% per year because few companies are drilling those plays. Shale gas must, therefore, continue to grow by at […]