Business
2:00 am
Tue April 17, 2012

U.S. Has A Natural Gas Problem: Too Much Of It

Originally published on Tue April 17, 2012 6:43 am

There's a boom in natural gas production in the United States, a boom so big the market is having trouble absorbing it all.

The unusually warm weather this winter is one reason for the excess, since it reduced the need for people to burn gas to heat their homes. A bigger reason, however, is the huge increase in gas production made possible by new methods of coaxing gas out of shale rock formations.

Peter Ricchiuti, a professor at Tulane University in New Orleans and an expert on oil and gas production, says the normal supply-and-demand laws of economics aren't working as they used to in the industry.

"Historically, this has always been kind of a self-governing mechanism," Ricchiuti says. "When natural gas prices got too low, you'd start to see the industry lay down rigs until prices went back up again, and it was very effective. It was sometimes jokingly referred to as the 'Redneck OPEC.' "

OPEC refers to the Organization of the Petroleum Exporting Countries, a grouping of the world's major oil producers.

That's not happening this time, and Ricchiuti says there are a couple of reasons the industry isn't responding as usual to price pressures. One reason is that during the shale gas explosion of the past few years, production companies spent big bucks leasing mineral rights in vast shale gas areas from Pennsylvania to Texas.

Joe Averett lives in the middle of one of those areas, the Haynesville Shale in northern Louisiana. The oil and gas industry veteran says drilling continues there because many of the three-year leases will expire soon if the producers don't drill.

"They're still drilling wells just to hold the lease, and them having to do that, that's continued the excess production," Averett says.

Averett says it's not unusual for gas production to outstrip demand at this time of the year, as stocks begin to be built for the next winter. Today, there's dramatically more produced than consumed, he says, and that has him worried.

"I think there's a reasonable chance [we] will fill up the storage this year," he says.

Averett knows a lot about storage. He's retired now, but his company, Crystal Gas Storage, built some of the huge salt-dome caverns for natural gas in Texas and Louisiana.

Ricchiuti cites one more reason production continues despite the low natural gas prices.

"About a third of all natural gas wells have a certain amount of what we call natural gas liquids," he says, "that could be propane or butane, things like that. And that's very valuable."

In fact, it would make economic sense for producers to keep pumping even if the natural gas price goes to zero.

Fred Callon, a small independent producer based in Mississippi, says that same logic holds for some of his crude oil wells in the Permian Basin in Texas.

"Our projects out in the Permian Basin, of course, are driven by the crude oil prices, and to the extent that they have associated gas, then that is sold, and so there is new natural gas coming to the market," Callon says.

Ricchiuti says there's obviously great promise to go along with the problems associated with America's newly found vast amounts of cheap natural gas.

"In the long term, you've got all these positives," Ricchiuti says. "It's clean burning, it's domestically produced [and] it's abundant. [It] has all of these great properties. It seems like a godsend, but at least in the short term, we're in real trouble down here."

Ricchiuti says he thinks that ultimately, the supply-and-demand equation will reach balance. After all, every new electrical generation plant on the drawing board in the U.S. burns natural gas.

In addition, trucking firms are looking at a crash program to build natural gas refueling stations along the interstate highway system to refuel new long-haul trucks that burn natural gas. In the meantime, though, the overabundance of natural gas is a threat to many producers.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

LYNN NEARY, HOST:

It's MORNING EDITION from NPR News. I'm Lynn Neary. Renee Montagne is on assignment.

STEVE INSKEEP, HOST:

And I'm Steve Inskeep. Good morning.

This is one of those moments that makes energy producers a little tense. There is a boom in natural gas production in the United States. A boom so big the market cannot absorb it all. That has driven prices to ten-year lows, threatening the viability of some producers. And as NPR's John Ydstie reports, it's possible the country could run out of room to store the gas.

JOHN YDSTIE, BYLINE: The usually warm weather this winter is one reason for the natural gas glut. It reduced the need for people to burn gas heating their homes. But a bigger reason is the explosion of gas production made possible by new methods of coaxing gas out of shale rock formations.

PETER RICCHIUTI: The natural gas supply in the United States is an incredible glut like we have never seen before.

YDSTIE: That's Peter Ricchiuti, a professor at Tulane University in New Orleans and an expert on oil and gas production. Ricchiuti says the normal supply and demand laws of economics aren't working as they used to in the industry.

RICCHIUTI: Historically, this has always been kind of a self-governing mechanism. When natural gas prices got too low you'd start to see the industry lay down rigs until prices went back up again. And it was very effective. It was sometimes jokingly referred to as the Redneck OPEC.

YDSTIE: But that's not happening this time. Ricchiuti says there are a couple of reasons the industry isn't responding as usual to price pressures. One, is that during the shale gas explosion of the past few years production companies spent big bucks leasing mineral rights in vast shale gas areas from Pennsylvania to Texas.

Joe Averett lives in the middle of one of them, the Haynesville Shale in northern Louisiana. The oil and gas industry veteran says drilling continues there because many of the three year leases will expire soon if the producers don't drill.

JOE AVERETT: They're still drilling wells just to hold the lease, and them having to do that, that's continued the excess production.

YDSTIE: Averett says it's not unusual for gas production to outstrip demand at this time of the year, as stocks begin to be built for the next winter.

AVERETT: But today, it's dramatically more excess production than the consumption.

YDSTIE: And that's got him worried.

AVERETT: I think there's a reasonable chance that we will fill up the storage this year.

YDSTIE: Averett knows a lot about storage. He's retired now, but his company Crystal Gas Storage built some of the huge salt dome caverns for natural gas in Texas and Louisiana. Peter Ricchiuti cites one more reason that production continues despite low natural gas prices.

RICCHIUTI: About a third of all natural gas wells have a certain amount of what we call natural gas liquids. That could be propane, butane, things like that. And that's very valuable.

YDSTIE: So valuable that it would make economic sense for producers to keep pumping even if the natural gas price goes to zero. Fred Callan, who's a small independent producer based in Mississippi says the same logic holds for some of his crude oil wells in the Permian Basin in Texas.

FRED CALLAN: Our projects out in the Permian Basin are of course are driven by the crude oil prices. And to the extent that they have associated gas, then that is sold and so there is new natural gas coming to the market in many of the plays that are driven by crude oil today.

YDSTIE: Peter Ricchiuti says obviously there's great promise to go along with the problems associated with America's newly found vast amounts of cheap natural gas.

CALLAN: In the long term you've got all these positives. It's clean burning. It's domestically produced. It's abundant. It has all these great properties that seems like a godsend. But yet, for at least in the short term, we're in real trouble down here.

RICCHIUTI: Ricchiuti believes ultimately the supply-demand equation will reach balance. After all, every new electrical generation plant on the drawing boards in the U.S. burns natural gas. In addition, trucking firms are looking at a crash program to build natural gas refueling stations along the interstate highway system to refuel new long haul trucks that burn natural gas. In the meantime, though, the overabundance of natural gas is a threat to many producers.

YDSTIE: John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.