Processing Magazine

Natural gas prices soar by 60% but remain too low for new operations

July 24, 2013

<photocredit>Konstantin Bolotinskiy/iStockphoto/Thinkstock</photocredit>

New data from the U.S. Energy Information Administration (EIA) has shown that natural gas prices rose by nearly 60 percent over the first half of 2013 but still remain too low to make new drilling viable in most states.

The agency announced that at present, contracts for delivery of natural gas were selling at $3.70 per million British thermal units, which was slightly below the average of $3.75 for the first six months of the year. By contrast, during the same period of last year contracts sold for an average of $2.39.

The increase of 57 percent resulted in numerous power generators switching to coal from natural gas because the use of coal makes more economic sense under the present market conditions, officials from the EIA commented.

Despite the sharp increase, the current price is still very low and most producers are unwilling to embark on new projects as they calculate that making a profit at this point is highly unlikely, explained James Sullivan, senior analyst for Alembic Global Advisors, which monitors natural gas prices. The company estimated that prices would have to reach about $5 before operators see any point in starting new drilling operations for natural gas, he added.

Still, predictions for the near future see natural gas prices remaining way below the $5 mark. During the shale boom era it would be unlikely to see prices go up dramatically and expectations are for shale gas to be valued at between $3.50 and $4.50 by the end of the year, Sullivan stated. Increasing natural gas production across the United States is doing little to drive prices up.

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Sullivan noted, though, that many of these wells are also producing oil. Depending on where that oil and other liquids-rich drilling are produced, the amount of natural gas extracted during those operations varies between 30 percent and 45 percent. This type of natural gas will continue to be produced at any price, as long as oil prices remain stable, he pointed out.

According to the EIA, the only area where natural gas production is still on the rise in the Marcellus Shale in the northeast of the country. Wells there are economically viable to drill even at these prices because of the specific properties of the shale rock formations that allow wells to be shallow and very productive, FuelFix website reported.

A report issued earlier this year by the non-profit, non-partisan Bipartisan Policy Center estimated that the United States had more than sufficient resources of natural gas to meet its entire domestic demand and even to export without this having a serious impact on natural gas prices. It also calculated that in the worst case scenario, where U.S. supplies are restricted and demand surges, natural gas prices are not likely to come anywhere near peaks seen in previous years.

The analysis stated that exports of natural gas are more likely to be influenced by domestic natural gas prices than vice versa and exports are not expected to have a dramatic effect on domestic natural gas prices.