Record Natural Gas Production: The Good News and the Bad News

AdobeStock 133657300
AdobeStock 133657300

In its Short-Term Energy Outlook for March, The U.S. Energy Information Administration (EIA) announced that the domestic oil and gas industry in the United States had set a new record for overall natural gas production during 2017, and would set another new record in the same category this year.

This bit of information presents stakeholders in U.S. natural gas — which includes pretty much all of us who live in America, as well as hundreds of millions of people in other countries who now benefit from imports of U.S. liquefied natural gas (LNG) — with both good news and bad news.

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 because 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. The most notable exception is 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. Yes, really — that is not a typo. Tankers filled with Russia-produced LNG landed in Boston Harbor over the winter thanks to the acts of politicians who deny their citizens access to natural gas produced just a hundred miles away. Dogs and cats living together, mass hysteria.

• But back to the good news. The EIA report is also good news for the state of Texas, where Saudi Aramco announced in early April 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 as a result of 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 uptick 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, because 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 toward natural gas. In the same report, the EIA also projected a very significant increase in 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 — “Fracing” — and horizontal drilling technologies that make it possible to extract the gas from shale formations.

Without the marrying together of those technologies to produce natural gas from shale, the U.S. would be in a dramatically different situation. We’d be living in a world with very high natural gas prices — with no truly scalable, cleaner alternative to coal-fired power generation and the need to rely on massive imports of LNG from places such as Russia and Qatar. Also, there would have been no recent boom in manufacturing or any of the thousands of high-paying jobs the boom has produced.

As a matter of fact, those were pretty much the projections contained in an official study conducted by the National Petroleum Council (NPC) on the potential for U.S. natural gas in 2003. The NPC is a federal advisory council that produces studies such as this at the request of the Secretary of Energy.

To conduct such studies, the NPC brings together the best and brightest from industry, government and other stakeholder groups. The 2003 natural gas study was led by ExxonMobil, but many other companies in the related industries assigned subject matter experts to work on it. I personally chaired one of the subcommittees on behalf of my employer at the time, Burlington Resources.

You have to remember that in 2003, the industry was still in the early stages of developing the first big shale play, the Barnett Shale in North Texas. Other massive natural gas resource plays, such as the Haynesville Shale in Louisiana and the Marcellus in Pennsylvania, had yet to be discovered. During 2002, when the bulk of the study was conducted, the best minds in the U.S., oil and gas industry really had little idea of the massive, almost inexhaustible volumes of natural gas locked in shale formations across the country.

Now, 15 years later, we do. Whereas the 2003 outlook for natural gas in the U.S was one of limited supply and high prices as far as our imaginations could take us, the outlook in 2018 is for massive abundance and comparatively low prices as far as the eye can see.

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.


About the author: David Blackmon is the Editor of SHALE Oil & Gas Business Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles — the last 22 years engaging in public policy issues at the state and national levels. Contact David Blackmon at [email protected].


Please enter your comment!
Please enter your name here