The U.S. Natural Gas Story in 15 Charts

The story of U.S. natural gas gets referenced a lot but you may not know what's going on. Here are 15 charts that tell the story of the U.S. natural gas market.

Rise of horizontal drilling and hydraulic fracturing
In the past few years, new technologies and cheaper costs allowed producers to access gas trapped in parts of the U.S. previously considered unreachable. These include:

  • Drill bit steering has been enhanced.
  • Exponentially improved and perfected techniques for hydraulic fracturing. These were first pioneered by Mitchell Energy, now part of Devon Energy (NYSE: DVN  ) .
  • The development of horizontal drilling, which allowed for much cheaper costs. Whereas before you might need to drill 10 wells in an area, you could now drill just one.

With new techniques for fracturing, and much lower costs from horizontal drilling, companies were able to spend less and learn much more quickly than they would have otherwise. Horizontal drilling has now essentially taken over drilling in the U.S.

Drilling for natural gas took off in shale plays across the U.S.

Source: Baker Hughes North America Rotary Rig Count

Source: Baker Hughes North America Rotary Rig Count

Source: EIA

Notice the Marcellus going from nothing to a major contributor in just two years.

Source: EIA

Production took off, weak demand dampened prices, storage filled up early
As more companies have tapped these unconventional plays, U.S. natural gas production has risen roughly 24% over the past five years, to 65.7 billion cubic feet per day, or Bcfd for short.

Source: Baker Hughes North America Rotary Rig Count

Rising production coupled with weak demand pushed down prices. There previously had been a rush to secure drilling leases in the U.S., but companies needed to drill otherwise they would be forced to give up the leases. Money from outside investors allowed the supply growth to continue in the face of challenging economics.

Things came to a head at the end of October 2011 when storage facilities basically reached capacity at 3,800 Bcf. With nowhere to store natural gas the price began to fall.

Source: EIA

As you can see above, supply going into storage in 2011 (the green line) was much higher than the averages over the previous five- and 10-year periods.

Retreat begins, rigs shift to search for oil and natural gas liquids
Natural gas companies saw the writing on the wall. Rigs drilling for natural gas peaked in the last two weeks of October 2011.

Efforts from the likes of Sandridge Energy (NYSE: SD  ) and others had been steadily building to use techniques learned in natural gas to drill for oil and natural gas liquids. As natural gas was no longer profitable there was no stopping the trend of rigs drilling for oil. The only thing slowing it down was rigs specifically targeting plays with natural gas liquids. Chesapeake Energy (NYSE: CHK  ) and Kodiak Oil & Gas (NYSE: KOG  ) shifted their focus to liquids while others focused on oil.

Source: Baker Hughes North America Rotary Rig Count

Warm winter, low demand, natural gas price plummets
Mother Nature then decided not to cooperate with natural gas companies. Companies needed a cold winter but it was the warmest in years. Winter is important for the natural gas economy in order to use all the excess supply that was stored for the winter months. The demand wasn't there for the stored gas and with so much excess supply the price of natural gas collapsed to a low of just under $2 in April.

Source: EIA

Source: EIA

The cure for low natural gas prices is low natural gas prices
The laws of economics can work surprisingly well. Prices have slowly recovered to $3.6 per thousand cubic feet (mcf), but are still below many producers price of production. Low prices have led to an increase in demand from power companies, which took advantage this past summer of the cheap natural gas prices.

 

Source: EIA

On the supply side, low prices for natural gas have stalled production at just below 66 Bcfd. The retreat from natural gas drilling has been fast; in October 2011 there was a high of 936 rigs drilling for natural gas, today there are just over 400. Gas production would have fallen but the boost in oil drilling and production also generated a growth in associated gas that made up for the lost natural gas production. As such, natural gas production has been flat over the past 12 months, instead of declining.

Associated gas numbers aren't out yet for the year but this slide from Encana's (NYSE: ECA  ) projections for 2012 gets the point across. Associated gas production grew faster than Encana projected and is believed to have already hit 9 Bcfd.

Source: Encana

The future
So what does the future have in store for natural gas?

U.S. natural gas prices are remarkably low compared to the rest of the world.

You can read an explanation of why natural gas prices around the world are so different. This disparity won't last forever -- new demand is rising to take advantage of the low U.S. natural gas prices. American chemical companies and manufacturers are building new plants to take advantage of the comparatively low natural gas prices.

A second large source of natural gas demand growth will be exports. Currently there is one approved export terminal and 15 projects more are working their way through the approval process to export natural gas. If all 15 are approved and completed, then they will represent 23 Bcfd of new demand. While none will be finished till early 2015, they represent a huge longer-term source of demand.

The third and final source of growth is from power companies that are seeking to replace coal power plants with natural gas plants that are cheaper to manufacture and operate.

Foolish bottom line
While we can't be sure of what will happen to prices in the short term, in the medium term we expect the price of natural gas to rise.

Energy investors would be hard-pressed to find another natural gas company trading at a deeper discount than Chesapeake Energy. The company just put together a sale to improve its debt profile, allowing it to tackle its 2013 production schedule. While issues still persist, giant steps have been taken to help mitigate the problems seen throughout 2012. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand new premium report on the company. Simply click here now to access your copy. As an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.


Read/Post Comments (21) | Recommend This Article (88)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 14, 2012, at 6:47 AM, skypilot2005 wrote:

    Dan,

    Thanks, for putting this together.

    Sky

  • Report this Comment On December 15, 2012, at 12:52 PM, EarlyCEO wrote:

    Dan, Many thnaks for this summary. Can you comment on CQP as an investment in LNG exports?

  • Report this Comment On December 15, 2012, at 1:00 PM, mikevr1463 wrote:

    "While none will be finished till early 2015". (This assumes Chenier will be the first).

    In reality, the Canadians (and perhaps some US via Marcellus and ENB) will begin exporting LNG in 2014. The Canadians earlier timetable has placed enormous pressure on the DOE to hasten its approval process.

  • Report this Comment On December 15, 2012, at 1:33 PM, Grey99 wrote:

    It is mistake to believe that gas will replace coal for firing power stations. It is very much a mixed bag. One consideration that is not apparent in the press is the lack of infrastructure and how expensive it will be well as the EPA and permitting for such gas lines. There is no doubt that gas will fire many more power stations, but it will not replace coal for a long long time. Coal fired stations will become bigger, more efficient and cleaner. The US EIA predicts that coal will remain the single largest component of the electric power fuel mix for at least the next 30 years. In addition, gas will eventually become more expensive and less competitive than coal in many situations. Make no bones about it, coal is here to say for at least the next couple of centuries.

  • Report this Comment On December 15, 2012, at 2:30 PM, kthor wrote:

    thanks for the shale play photo ..will DL it for future reference of shale plays in the US ...

  • Report this Comment On December 15, 2012, at 2:41 PM, 2centsworh wrote:

    gas companies are getting a free ride paying private landowners pennies/ year for billions of cubic feet of underground storage.

  • Report this Comment On December 15, 2012, at 11:46 PM, sevenheart wrote:

    Coal is ideally suited for electrical generation, because of the volume it requires rail transportation and it can be and is burned cleanly. Using Nat Gas to generate electricity is almost criminal. It can be transported easily to the point of use via the network of pipelines (more miles of pipelines than highways in the US) where it can be burned at 95% plus efficiency to heat homes or water, can cleanly power vehicles, like the bus system in Washington, DC. To use it to generate steam and then reduce the efficiency with line losses (electricity has it's own brand of friction) drops the efficiency of consumption to as low as 50% in some cases. Gas provides the most efficient energy we have available, minimal refining (removal of liquids and other impurities) and should be used efficiently.

    Don't get me wrong, I've made my living in Nat Gas for over 30 years- it's just important that we use any of our abundant resources as wisely as possible. Nuclear and coal power suit the grid system best of all resources we have, natural gas can be very specifically target to it's highest use. And as for CO2......... if it's so bad why do plants need it for photosynthesis? Come on, CO2 makes up less than 4/10ths of one percent of the atmosphere, if a miniscule (naturally cyclical) increase in CO2 will destroy the planet then the earth is too fragile to sustain life, cash in your chips- but please don't decompose, that would only create more deadly CO2.

  • Report this Comment On December 16, 2012, at 6:22 AM, amvet wrote:

    A comprehensive article. Regarding "Gas production would have fallen but for the boost in oil drilling...." there are reports that many NG wells were drilled but not put on line. Now these are being put on line and producing.

  • Report this Comment On December 16, 2012, at 8:51 AM, sevenheart wrote:

    Footnote regarding 2centsworth- Royalty paid to landowner is 12% of production plus leases. Some areas of the Bakken and Marcellus paid up to $10,000 per acre for a lease- not a purchase- the owner retained all surface rights.

    amvet- the cost of production (not the cost of drilling which can run from about $2 million to $15 million) is $4 per mcf (1000 cu ft.) if gas is selling for $3.61 per mcf wells are shut in until market conditions improve. Wells are typically drilled before pipelines are built, build a pipeline then drill a bunch of dry holes (happens more than you think $7 million for nothing), not happening. Often with permitting it can be 1-7 years for pipelines to reach a productive field.

  • Report this Comment On December 16, 2012, at 2:35 PM, Davedawg wrote:

    So what are people's views on HEK, CLNE, WPRT and UNG? Think these will take off in the next few years?

  • Report this Comment On December 17, 2012, at 9:22 AM, sevenheart wrote:

    interdependent,

    Please get a little independent and look up what percentage of the atmosphere is CO2, then with your new found independence read everything you just wrote up here and justify the crisis.

    Our media hasn't reported this but the normal warming cycle cycle ended 16 years ago.

    Study geology and you'll discover that the earth has been much warmer and much colder in the past and CO2 was much higher and much lower. The public has been played on these natural cycles, as if they were man caused. The earth is much bigger than small minds will acknowledge.

  • Report this Comment On December 17, 2012, at 2:54 PM, NickD wrote:

    So you want to reduce CO2 in 2013 by .0042% God help us.

  • Report this Comment On December 17, 2012, at 3:20 PM, Darwood11 wrote:

    Dan,

    Great article.

    As commented, I too have some reservations about natural gas replacing coal. But it will certainly displace some coal, which currently provides the source of energy for 42% of the electrical generating plants in the U.S. (Source: IEA 2011). To put this into perspective "renewable" sources provide about 13% of the total. Nuclear provides nearly 50% more than renewables.

  • Report this Comment On December 17, 2012, at 3:25 PM, Darwood11 wrote:

    @interdependent,

    I sympathize with your perspective. According to reputable sources, we have about 2 billion too many people on the planet, and that causes stress. Stress, for example, as indicated by climate change.

    However, here in the U.S. most people don't "walk the talk" and that includes the so called "enlightened."

    Do they drive really fuel efficient cars and combine trips, so a family of four has only one automobile? Do they live in energy efficient housing such as multi-unit, or single unit with 6" insulated walls and 12" insulated ceilings, with high energy appliances (furnace, HVAC, PCs, LED lighting, etc?

  • Report this Comment On December 17, 2012, at 9:21 PM, eldetorre wrote:

    sevenheart,

    Yes the earth has been much warmer and much colder in the past and CO2 was much higher and much lower. But that in itself is meaningless.

    The point is that our contribution will act as an amplifier of existing natural cycles not a usurper of natural cycles. The earth in the past has been very close to tipping points that would have meant the loss of most life as we know it.

  • Report this Comment On December 17, 2012, at 11:37 PM, sevenheart wrote:

    CO2 is less than 4/10ths of 1% of the atmosphere, if human activity increases CO2 by 50% we're still not at a full percentage point of the atmosphere. If that spells doom for the planet then it's over, the planet is too fragile to support life. But, the fact is it is not too fragile. The period of time with the highest CO2 was also a time of incredibly abundant life. Plants need CO2 for photosynthesis, if they have more CO2 they grow better. Just our existence will tip the earth off some mythical fulcrum into eternal oblivion? So perhaps we can create a myth like Walt Disney productions did about lemmings and all go jump off a cliff.

    Scientific ignorance is not forgivable, especially when it is the product of systematic, unquestioned indoctrination. Flat earth, a solar system revolving around the earth and impossibility of manned space travel was settled science too, but real science doesn't stop questioning and it doesn't ignore science that directly contradicts the theory.

    Earthworms digesting decomposing vegetation in the tropical zone of the planet account for about 10 times the CO2 attributed to human activity. I know you haven't read that research, it doesn't match the objectives of the propagandists foisting global warmin....er excuse me, since the earth isn't warming for the last 16 years we'll call it climate change. Perhaps it's time to revive the call for a new ice age like we had in the 1970's.

    I know it is useless to ask you to dig a little deeper, In the words of a once great rock and roll band, REM- look who bought the myth.

  • Report this Comment On December 17, 2012, at 11:56 PM, sevenheart wrote:

    Let's put one trillion into perspective as well, since trillions get thrown around like rice at a wedding lately.

    You loan me one dollar and I tell you I will pay you back in 1 million seconds. I will pay you back in about 12 days. I tell you I will pay you back in 1 billion seconds and I pay you back in 32 years. I tell you I will pay yo back in 1 trillion seconds and I will pay you back in 32,000 years. Throwing trillions of dollars to control the myth of CO2 is lunacy.

    Anyone remember Biosphere- the little man made globe in the desert by Tuscon to study how we could live when the earth refuses to support us? The first one failed miserably because the CO2 level climbed as the intensive vegetation growth that occurred deposited more dtritius and created more CO2 which created more plant growth and detritus and soon there wasn't room for the animals.

    I wish I could just sit back and laugh at the foolishness that is climate change, but when people think that we somehow are responsible for natural cycles and that there is a static level of 350 ppm (that's 35/100ths of 1%) that is optimal and that somehow humanity has the ability to maintain that (which is ignorant and entirely comical) then start demanding we go back to the stone age, I can't be quiet.

    Everyone has time to go take a good geology class at you local college before we do anything. Please, learn the truth, not what some blogger puts out to advance a political agenda.

  • Report this Comment On December 18, 2012, at 2:41 AM, snapperreef wrote:

    Thanks for an information filled article Dan. And thank all you commenters for additional information.

    I own some land in the Warrior Basin in AL and always am looking to see if that region is heating up.

    So far, no oil/gas company has shown any interest in leasing since the last big oil price run-up around 2006.

  • Report this Comment On December 19, 2012, at 2:28 PM, Magnegas wrote:

    About all one can say about Natural Gas is that it is cleaner than Coal

  • Report this Comment On December 22, 2012, at 12:41 AM, wrm006 wrote:

    If power plants are actually transitioning from coal to NG, what companies are building these new boilers? How will the NG be transported and stored? What companies will benefit from this?

  • Report this Comment On January 04, 2013, at 6:59 PM, dsciola wrote:

    Great article Dan. So what's the bear argument to betting on NG and NG related companies?

    Seems almost too good to be true how cheap NG is, given all the potential tailwinds. Wonder if there are certain factors other market particpants know about that may keep NG prices down indefinitely and delay indefinitely any value creation for NG firms.

    Per your statement, "Prices...recovered $3.6...still below many producers price of production." What price will put producers in the black? Is this the America only price, and if so, why can't they take advantage of higher prices elsewhere and produce to make a profit?

    Thanks again,

    Dom

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