Carpe Diem

Wholesale natural gas prices fell 31% in 2012 to 13-year low

From the Energy Information Administration:

Average wholesale (spot) prices for natural gas fell significantly throughout the United States in 2012 compared to 2011 (see red line in chart). The average wholesale price for natural gas at Henry Hub in Erath, Louisiana, a key benchmark location for pricing throughout the United States, fell from an average $4.02 per million British thermal units (MMBtu) in 2011 to $2.77 per MMBtu in 2012. This was the lowest average annual price at Henry Hub since 1999.

Note: Adjusted for inflation, the 2012 spot price is the lowest average annual price in at least 16 years, going back to 1996 or earlier (see blue line in chart). The EIA’s annual wholesale price series starts in 1997, and earlier data aren’t available.

A mild 2011-12 winter, sustained high natural gas inventories, and rising natural gas production in the Marcellus and Eagle Ford basins contributed to lower average spot natural gas prices at Henry Hub. Average spot natural gas prices at Henry Hub fell despite rising natural gas use for power generation, lower overall natural gas net imports from Canada by pipeline, reduced liquefied natural gas imports, higher natural gas exports to Mexico, and temporary production shut-ins related to Hurricane Isaac. Total natural gas production was higher in 2012 than in 2011; however, in contrast to 2011, when production grew steadily over the course of the year, 2012 saw production generally remain flat, close to the level reached towards the end of 2011.

MP: Thanks largely to the breakthrough technologies of hydraulic fracturing and horizontal drilling, which have accessed oceans of natural gas in areas like the Marcellus region, natural gas prices continue to fall. In just the last four years, wholesale natural gas prices have fallen by more than 70%, from $9.44 per MMBtu in 2008 to $2.77 last year.  In addition to creating thousands of jobs in the oil and gas industry, the shale revolution has delivered billions of dollars in savings for America’s residential, commercial and industrial users of natural gas. Think of the 31% drop in natural gas prices last year as another powerful and well-timed, energy-based economic stimulus to the US economy, as a direct result of the shale revolution that started in 2008.

11 thoughts on “Wholesale natural gas prices fell 31% in 2012 to 13-year low

  1. a question;

    why would we want to look at this on a cpi deflated basis?

    it might be better to look at it in comparison to income.

    that would give you a better sense of affordability.

    • I’ve calculated the annual “time cost” of wholesale natural gas using the average hourly wage, and it’s almost exactly the same as the inflation-adjusted price, because wages have been increasing at about the same rate as the CPI. The “time cost” of wholesale natural gas was lower in 2012 than at any time during the series back to 1997.

      Practically though, I’m not sure it would make sense to most people to see the time cost of wholesale natural gas expressed as the “number of minutes of work at the average hourly wage to purchase one million BTUs of natural gas at the wholesale spot price.” The average American working at the average hourly wage is NOT buying natural gas at the wholesale level in amounts of one million BTUs.

      Perhaps it would make sense to calculate the “time cost” of residential natural gas, but the EIA’s report is on the wholesale price of natural gas in 2012, so that’s what I reported on here.

      • well, or you could just deflate the nominal price with the wage index instead of cpi and call it an “earnings adjusted price” or some such.

        it just seems like a more relevant metric to me than, say comparing it to price changes in cornflakes.

        just my 2c.

  2. Total will halt making new investment in dry shale gas in the United States while gas prices remain low, chief executive Christophe de Margerie has said. The French oil major has joint ventures with Chesapeake Energy in the Utica shale area of eastern Ohio and the Barnett gas shale area in Texas. “It is not great because we have invested on the basis of gas prices that were far higher than today,”
    The French giant shelled out $2.25 billion for a 25% slice of Chesapeake Energy’s Barnett Shale assets in January 2010. “Our investment in Texas shows a serious loss which, of course, does not question Total’s results or development,” he said. The Total chief said the company had invested in Texas on the basis of gas at more than $6 per British thermal unit, but that “today we are at $3.2 (per btu). It does not work”.

    http://www.upstreamonline.com/live/article1313649.ece

    • All of which means the prices will rise until it is economic again. If you look at history markets for oil and gas behave in a sequential shortage than glut basis. Recall that during the depression oil fell to .34/barrel and the governor of Texas sent in the national guard to shut production down. Now the real question is how long can they wait before its drill or loose the lease? If you were a rights owner hopefully you managed to put some sort of drill it or loose it clause in the lease.

      • No. What this means is that most of the shale producers, who have been using borrowed money to keep selling at a loss will go out of business and will wipe out their investors. While the creditors can keep running some of the wells the depletion rates would mean a collapse in production. That does not mean that you will see new investment once gas hits $6 per Mcf because many of the new wells will not be economic at that price unless the oil services sector undergoes restructuring through bankruptcy and the rigs are acquired in liquidation by new companies that can offer much lower service costs AND the states reduce the royalties to stimulate new development.

        • Look at booms/busts in history, even the 1980s bust as an example, lots of rigs got stacked as the drilling companies also went bankrupt. This is the story historically of the oil business being a resource business its a lot like the hard rock mining business in the west in the 19th century where a mine was a hole in the ground you threw money in and got nothing out. Look at towns like Austin or Eureka,NV for example or Tonapah. Railroads were built on the supposition that mines where great things (Utah Southern or the north part of the Salt Lake Los Angeles line) but then the great hope of a mine came up empty. What you discuss is part of the way resource extraction works. I think it would be interesting to see if overall mining in the 19th century in the west really made money, its clear that 19th century railroads did not (see the 1893 depression). The railroad boom of the 1880s and early 1990s reminds one of the telecom boom of the 1990s.

          • What you discuss is part of the way resource extraction works….

            There is a huge difference now. In the past investors and lenders took serious risks when they gave money to the operators so they were very careful in how the financed projects. That is not the case when the Fed is looking to be stimulative and credit availability keeps growing.

  3. Boy, the Fed must be way too tight to send the price of a commodity like natural gas tumbling like that….

    Why is it the inflation-hysterics never talk about the relation of the dollar to natural gas, but always to oil or gold?

    • Boy, the Fed must be way too tight to send the price of a commodity like natural gas tumbling like that….

      Ahh, the irony. The Fed was so easy with credit that companies that cannot generate positive cash flows for years can still get financing that allows them to sell their product as below cost.

      Why is it the inflation-hysterics never talk about the relation of the dollar to natural gas, but always to oil or gold?

      Why is it that the fools who criticize cannot figure out cause and effect?

  4. A friend just sent over a few links while finally admitting that there may be something to the shale gas bubble after all.

    The economics of fracking are horrid. All wells have decline rates where production drops over time. But instead of decades for traditional wells, decline rates in horizontal fracking are measured in weeks and months: production falls off a cliff from day one and continues for a year or so until it levels out at about 10% of initial production. To be in the black over its life under these circumstances, a well in the Barnett Shale would have to sell its production for about $8 per million Btu, pricing models have shown.

    Turns out, the shale gas revolution is an uneconomic activity even at much higher prices and is sustainable only for a limited time and only by blowing through loads of borrowed money. Now debt has piled up, cash flow is negative, and solvency risks are gathering on the horizon.

    With money running out to drill new wells, the steep production declines inherent in all shale gas wells are oozing into P&L statements, and suddenly, all that debt that made so much sense a year or two ago is unmanageable. Assets have to be sold off in a hurry, drilling diminishes further, and a vicious cycle overtakes the false promises of yore. And production, which lags behind rig count movements, will drop, and drop steeply.

    Meanwhile, the low price of gas has bent the demand curve: utilities are shifting massively from coal to gas for power generation. Their demand is eating through the record amount in storage and will clash later this year with diminishing production. It’s a classic example of how a price that is too low will spike, but only after a monumental massacre in the industry.

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