Natural Gas Prices

This article is the first in a series that will explore the natural gas industry, largely to understand the environmental impacts of extraction and to advocate for protection of water, air and the land.

Photo Courtesy of April Lane: A natural gas rig sits atop an Arkansas hill.

While there are many factors influencing production in the Fayetteville Shale, the issue of pricing now carries huge consequences that are only marginally understood by the public. For those who may find economics and business matters less than exciting, the drama that is playing out because of natural gas pricing will have direct consequences for all of us personally as well as environmentally. Everyone should have a sense of how we arrived at this point and where we are going if we hope to influence energy policies in a healthy, sustainable way.

Arkansas’ natural gas wells are recognized as being some of the least expensive to develop because of their geology, a minimum of state regulations and a favorable political climate. The abundance of surface water, low cost labor, and modest taxation are additional benefits for the industry.

A land rush of leasing activity started about 2004 as natural gas prices were beginning to rise. Speculators rapidly leased acreages that required massive investments in order to meet even minimum development requirements. Soon, the time clock was running and with it the need to develop leased section before they expired. With prices continuing upward, companies made large investments to develop enough wells to secure the leases.

After spending vast amounts on exploration, signing bonuses and public relations, well development and infrastructure production was profitable and economic projections were rosy for companies, royalty owners and state coffers. This led to further investment speculation. Studies funded by the industry projected strong earnings without a dip in demand in sight.

Signs of over-production began to surface about the time that exploration and production companies were having cash flow difficulties. In order to continue the intensive capital investment track they were on, mergers and sales to foreign interests began taking place in the search for deeper pockets. But still the prices continued to drop.

A weakened economy along with a mild winter further eroded demand and overloaded storage capacity, which traditionally emptied in the winter, making room for summer production. In order to cope with this glut, the appeal to export liquefied natural gas and encourage vehicle conversion from gasoline to compressed natural gas has come into full bloom.

The potential change from being an importer of natural gas to an exporter in less than a decade introduces serious policy issues. Once the United States has the capacity to export LNG onto the world market, U.S. consumers will be subject to price increases. Producers with an option to sell into more lucrative markets like Japan, China, and Europe will go where profits are greatest. Production will increase substantially once the price generates a profit over expenses. Environmental risks will accelerate, if regulations and inspections have not improved. The intensive, expanded production of LNG (largely methane) will have serious negative impacts on climate change.

Ironically, the price increase will make use of natural gas less favorable in electrical power generation so that coal will remain the fuel of choice for generating plants.