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Energy & Environment

Natural Gas Prices Plummet to a Seven-Year Low

Published: August 20, 2009

HOUSTON — Natural gas prices plunged on Thursday to levels last reached in 2002 after an Energy Department report showed that the amount of gas in storage had hit a record high for this time of year.

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Scott Dalton/Bloomberg News

Workers on a drilling rig for an EBR Energy natural gas well near Columbus, Tex. Companies have cut back on drilling new wells.


Times Topics: Natural Gas

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The sharp price decline of natural gas, to below $3 per thousand cubic feet from a peak of over $13 last summer, has been caused by a drop in demand from factories and homes because of the recession, coupled with a big expansion of domestic production over the last few years.

“It is tough times in the gas business, certainly,” said Thomas F. Darden, chief executive of Quicksilver Resources, a major natural gas producer, after the government stockpile report was released. “Prices today are below our costs to produce, so in our view this is not a sustainable scenario.”

Even as it reflects weakness in the economy, the declining price of natural gas will be good for many industries and consumers. It is gradually bringing down utility bills for the 60 percent of American homes that use natural gas to fuel stoves, water heaters, furnaces and other appliances. And since natural gas is an important fuel for utilities and factories and a prime feedstock for the chemical and fertilizer industries, the price collapse helps cut their costs.

Kathy Mathers, a vice president of the Fertilizer Institute, a trade organization representing manufacturers and retailers, said rising natural gas prices over the last six years had forced 30 fertilizer plants, representing half of domestic production, to close. Foreign producers, with access to cheaper natural gas, have claimed more and more of the market.

Ms. Mathers said the price decline this year “provides important relief,” adding that “it won’t bring the old plants back but it will save the remaining U.S. production.”

Gas executives saw a silver lining, arguing that the low prices would help them make a case in the Senate when it takes up energy and climate change legislation later this year. The gas companies want federal incentives to sway utilities to switch to gas from coal, and they want more government entities and businesses to convert their diesel bus and truck fleets to compressed natural gas.

The House version of the legislation, passed in June, disappointed industry leaders who contended that coal interests got a better deal than they did, even though gas is a cleaner fuel.

The weekly Energy Department natural gas stockpile report showed that underground storage in the lower 48 states rose by 52 billion cubic feet, to about 3.2 trillion cubic feet, for the week that ended last Friday. That is a storage level 21 percent above the level a year earlier and 19 percent above the average for the last five years at this time of year.

It is normal for stockpiles to grow during the summer, but the current level is usually reached in late September or October.

Natural gas is produced from wells at a fairly steady rate, but use of the fuel is highly seasonal, so summertime production is stored in large reservoirs for use during the winter. The country has about four trillion cubic feet of gas storage capacity, almost entirely in tapped-out wells, salt caverns and aquifers.

Gas demand is so weak and supply so abundant that some experts think the country could run out of storage capacity before the winter heating season begins, requiring gas companies to reduce flow from their wells or even shut down production.

Gas executives, who have already cut back severely on drilling new wells this year, say they are loath to cut production on wells already completed, but they may have no other choice if the storage system and pipeline network get backed up.

“We have never been here before in terms of what to expect when storage gets this high,” said Aubrey K. McClendon, chief executive of Chesapeake Energy, another major gas producer. “It’s like a balloon; there comes a point where you can’t blow any more air into it.”

Mr. McClendon said he hoped that low gas prices could stimulate more replacement of coal with gas by utilities, something that is beginning to happen in some places, and he was also hopeful a cold winter would spur demand.

“It doesn’t set the stage for $10 gas, but it does set the stage for $6 to $8 gas, which is in our view a fair price for consumers and producers,” Mr. McClendon added.

Kenneth B. Medlock III, an energy economist at Rice University, said there had not been such a drastic storage buildup since 2002, the last time gas prices swooned during a recession. But he said the situation could be temporary and prices could quickly rebound, noting, “If the economy starts to recover, and recover quickly, we will eat through those inventories very quickly.”

The price decline is rooted in supply and demand. Energy experts note that factories and power plants have slowed production because of the weak economy. The Energy Department reported that consumption of natural gas was down about 5 percent in May from May 2008.

On the supply side, a boom in domestic production has followed improvements in recent years in drilling technology, opening immense shale gas fields across Appalachia, the Great Plains and northern Texas and Louisiana.

Trying to head off the developing glut, the industry shut down gas rigs at a rapid pace over the first half of the year. According to the Baker Hughes oil service company, the number of gas rigs operating around the United States has been reduced to 688, from 1,586, since last August.

But because many of the shale wells are new and just beginning to flow, production has remained high. In fact, natural gas output this year has been slightly higher than last year despite the sharply declining rig count.

Industry executives say they are concerned that if the economy and prices do not recover, it will cripple smaller independent companies. Many suggest larger companies may soon buy independents at bargain prices.

“You are cutting into muscle now,” said Rodney L. Waller, a senior vice president at Range Resources. “Companies’ viability is being questioned. If you have sustained price reductions, you will see consolidation and layoffs.”

The price of gas plunged by more than 5 percent Thursday morning after the storage report was released, and trading on the New York Mercantile Exchange settled at $2.945 per thousand cubic feet. That is a 78 percent drop from the peak that gas hit on July 3, 2008, of $13.58.

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