Record U.S. Natural Gas Production: The Good News And Bad News
The U.S. Energy Information Administration (EIA) has good news and bad news for us this week where domestic natural gas is concerned:
The good news is that the oil and gas industry will set a new record for natural gas production in 2018.
The bad news is that the oil and gas industry will set a new record for natural gas production in 2018.
Wait, what? Yes, really.
First, the good news:
-The fact that domestic natural gas supplies remain abundant and cheap is terrific news for consumers , since it is the main fuel used for home heating across the country, and also provides a very large and growing share of electric power generation.
-When natural gas is abundant and cheap, utility bills are lower in most areas, with the notable exception right now of the New England area, where politically-motivated pipeline constraints have led the absurd outcome of residents of the states north of New York paying much higher prices than the rest of the country, and having to actually import LNG from Russia in order to meet the region’s natural gas demand.
-The EIA report is also good news for the state of Texas, where Saudi Aramco announced on Tuesday its plans to invest as much as $10 billion in new capital in its Beaumont-based Motiva refining and petrochemical operations to take advantage of low U.S. natural gas prices.
-Obviously, the report is great news for the petrochemical industry as a whole, and for the myriad other industries that use natural gas as a feedstock. The low natural gas prices have already resulted in a massive manufacturing boom in the U.S. over the last half-decade, and the prospect of ongoing record production levels promises to keep that boom going.
So, what’s the bad news, you ask? Here you go:
-The ongoing low natural gas prices largely created by record production levels in recent years is bad news for the State of Louisiana, where the once-bustling state tax cash cow Haynesville Shale remains a shadow of its former self despite a recent up-tick in the area’s rig count. The loss of revenues from the oil and gas industry has played a large part in creating a chronic budget shortfall situation for the state government there.
-The same holds true in Oklahoma, where lower revenues from the industry helped to create a similar intractable budget shortfall over the past few years.
-It’s bad news for the Oklahoma oil and gas industry in general, since the Oklahoma state government just enacted a major increase in the state’s oil and gas production tax rate as part of an effort to try to close that budget gap.
-It’s bad for mineral owners in the dry gas third of the Eagle Ford Shale region, who have been hoping for stronger natural gas prices so that they might be able to have their minerals leased and produced. For those folks (I’m one of them), the prospect of monetizing their mineral interests anytime in the near future remains a distant, seemingly unattainable dream.
-And, of course, the EIA report represents bad news for upstream companies whose asset bases are heavily-weighted towards natural gas.
In the same report, the EIA also projected a very significant increase natural gas exports and domestic consumption for 2018 and 2019. The problem is that the projected increases in the commodity’s production are larger than both demand generators combined in 2018, and almost as large in 2019.
This favorable supply/demand equation for natural gas has been made possible only thanks to the development of the much-demonized hydraulic fracturing – “Fracking” – and horizontal drilling technologies that make it possible to extract the gas from shale formations.
Without those technologies, the U.S. would be in a dramatically different situation. We’d be living in a world with very high natural gas prices, no truly scalable, cleaner alternative to coal-fired power generation, the need to rely on massive imports of LNG from places like Russia and Qatar, and no recent boom in manufacturing or any of the thousands of high-paying jobs that boom has produced.
So, bottom line, while the EIA report represents some bad news in isolated situations, the alternative would be far worse news for everybody . On balance, record domestic natural gas production is a very good thing indeed.