Natural-gas prices fall due to weather, production

Crank up the thermostat, or better yet, pocket the cash you're about to save. Natural gas prices are approaching their lowest levels in a decade because of mild weather and enormous production.

Natural gas futures plunged 6.8 percent Tuesday as forecasts of warmer weather have eroded demand just as production is ramping up from new resources such as Pennsylvania's Marcellus Shale.

The price for February delivery closed Tuesday at $2.49 per million British thermal units (about a thousand cubic feet), down from $3 at the end of December and $4.50 a year ago.

There's so much natural gas in storage that spot prices of $1 are likely in late February, according to a Bentek Energy report quoted Tuesday in Gas Business Briefing, a trade publication.

That's good news for consumers - half the nation's homes are heated with natural gas, and low gas prices also depress electricity prices. Industrial users who consume natural gas both as fuel and as a raw material for plastics and fertilizer also get a break.

But the glut of gas has some Pennsylvania natural gas producers worried that drilling will slow down because of the oversupply.

Louis D'Amico, president of the Pennsylvania Independent Oil and Gas Association, said that conventional gas-well drilling had virtually ceased because of low prices, and that bigger Marcellus Shale operations may start to slow until gas prices recover.

"These gas prices are a real heartache for conventional drilling in Pennsylvania," D'Amico said. Conventional drilling of shallow, vertical wells tends to be dominated by family-owned operators.

Industry experts say the glut is caused by new techniques to extract oil and gas from shale using hydraulic fracturing, the high-pressure injection of chemically treated water and sand to unlock entrapped fuel.

"I don't think anybody anticipated the reserves would build up like this," D'Amico said.

Not everyone is convinced the prices will remain low.

James T. Hackett, the chief executive of Anadarko Petroleum Corp., said his company had no immediate plans to slow down its Marcellus Shale operations. Anadarko is the largest producer in Pennsylvania's state forests.

"We don't view this as durable, this price behavior, or at least at this level," Hackett said Tuesday in an interview with Inquirer reporters and editors during a visit to Philadelphia by America's Natural Gas Alliance, a trade group.

The price plunge is occurring just after the White House issued an economic report endorsing the benefits of new natural gas discoveries. The report singled out the Marcellus Shale.

Price fluctuations are not unusual in gas commodity markets. Producers typically respond by increasing or decreasing well-drilling activity to match production to demand, a self-correcting process.

But some unusual circumstances are inducing more gas production now despite low prices.

More than a year ago, producers began shifting drilling rigs to areas that produce oil and natural gas liquids, whose prices are tied to soaring international crude oil prices. Since the wells' profitability depends upon oil production, the natural gas they produce is an added bonus, even at low prices.

Gas operators have also become more efficient at drilling horizontal wells and completing the work quickly. Wells are more productive and cost less to drill, said Kenneth B. Medlock III, an economics fellow at Rice University's Baker Institute for Public Policy.

For instance, Medlock said, the number of drill rigs operating in the Barnett Shale in northern Texas has dropped from 192 in September 2008 to 64 this week, but natural gas production has actually increased. "The operators are learning by doing," he said.

A slowdown in drilling and depressed gas prices mean smaller royalty payments to the owners of mineral rights.

Subash Chandra, a managing director at Jefferies & Co. in New York, said producers in dry-gas areas such as northern Pennsylvania could reduce activity in the second half of 2012 "if it becomes abundantly clear that gas prices will struggle to average $4 this year."

But Anadarko's Hackett said Marcellus drilling would be among the last affected by low prices because of its attractive economics.

The upside of lower prices would be increased industrial activity from "ecstatic" steel and chemical producers, he said.

"When you look at the industrial-jobs impact from the lower prices, they offset everything you might give up from people slowing down the [drilling] activity," Hackett said.