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Is The U.S. Gas Boom Already Over?

Irina Slav

Natural gas production in the Marcellus and Utica shale plays is growing at a slower pace than before as low prices persist, but demand has yet to catch up to supply.

S&P Global Platts reports that energy companies in the Appalachian Basin have started cutting back their new drilling, pressured by low gas prices on the one hand, and shareholder pressure for greater returns on the other.

At the moment, spot prices at two gas hubs in the region—Columbia Gas Appalachia and Dominion South—are about $1 per mmBtu. That’s down from $2.50 per mmBtu at the start of the year. During that time, gas production in the Marcellus shale grew by some 1 billion cu ft daily while production in Utica grew by about half that, with the average for September actually lower than the average for August.

Meanwhile, natural gas in storage is growing, too. The last gas inventory report by the Energy Information Administration showed the third weekly increase by a triple-digit number: 112 billion cu ft. That’s despite rising demand, too, which makes the outlook for gas producers even bleaker.

The production decline is not a snap decision. Several gas producers operating in the Marcellus and Utica plays already warned they would begin cutting back on new drilling in the second half of the year. What’s more, if the low gas prices persist and the forecasts for lower oil prices as well come to pass, lower production would remain for longer.

This is not necessarily bad, however. Investor pressure on U.S. energy companies does not only concern returns. Shareholders are increasingly worrying about the carbon, and more importantly methane, footprint of these companies. And still, the U.S. is on track to provide more than half of global gas supply by 2025.

Related: EIA Sharply Cuts Oil Price Forecast

In a recent story for CNBC, Todd Wassermann reported that energy companies’ major bet on natural gas, the greener substitute for coal, could backfire because of that investor concern.

“There’s a growing concern among investors that the oil and gas industry is making very big bets on natural gas as sort of the foundation for its long-term growth,″ Wassermann quoted a director from a shareholder advocacy group, Ceres, as saying.

“If methane is not properly addressed, it really undercuts any claim natural gas has to being lower-carbon,” Andrew Logan said.

Truth be told, energy companies are making an effort to address the issue even as the Environmental Protection Agency has rolled back Obama-era methane reporting requirements as part of the current administration’s energy dominance agenda. Big Oil is leading the charge against methane leaks, but it’s only a matter of time before independents follow; the reason investors worry about methane emissions is because worrying about emissions is the dominant narrative and it extends to business sustainability over the long term, regardless of the industry.

Natural gas futures have shed as much as 30 percent over the last 12 months. Winter is coming and this usually spurs a spike in gas demand, which in turn props up prices… unless it’s a mild winter. All gas producers can do at this point is keep drilling under control and hope the winter does not disappoint.

By Irina Slav for Oilprice.com

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