Natural Gas Prices Down, Inventories Up as Winter Approaches

Record production of natural gas in Texas and throughout the United States has created lower natural gas prices for consumers, but it has many companies that produce natural gas struggling to avoid bankruptcy.

One such company is Chesapeake Energy Corp., which is based in Oklahoma City, who was actively exploring in the Barnett Shale of North Texas some 10 years ago when gas prices were three times more than today. Chesapeake warned this week that low prices, which averaged $2.38 (down 11.5 percent), will contribute to a negative financial performance during the third quarter. Shares dropped 13 percent to $1.35 initially. Chesapeake was the second-largest natural gas producer in the U.S. just a few years ago.

The Energy Information Administration (EIA) reports a growing share of U.S. natural gas production is associated natural gas (natural gas produced from oil wells), which is the result of increased crude oil production from low permeability, tight rock formations. In 2018, associated-dissolved natural gas production in the five major crude oil-producing regions was 12.0 billion cubic feet per day (Bcf/d), or about 37 percent of total natural gas production in these regions and about 12 percent of total U.S. natural gas production.

The Permian region, which spans parts of western Texas and eastern New Mexico, has the most associated gas production of the five crude oil-producing regions, according to EIA. The Permian region produced 5.8 Bcf/d of associated gas in 2018, accounting for 51 percent of the Permian’s natural gas production total and surpassing non-associated gas production in the region for the first time. Record-high crude oil production from the Permian brings with it large volumes of associated gas.

Associated natural gas production in the United States increased from 4.3 Bcf/d in 2006 to 15.0 Bcf/d in 2018.

Working natural gas inventories in the Lower 48 states totaled 3,519 billion cubic feet (Bcf) for the week ending October 11, 2019, according to EIA. This is the first week that Lower 48 states’ working gas inventories have exceeded the previous five-year average since Sept. 22, 2017.

Weekly injections in three of the past four weeks each surpassed 100 Bcf, or about 27 percent more than typical injections for that time of year.

Working natural gas capacity at underground storage facilities helps market participants balance the supply and consumption of natural gas. When determining whether natural gas inventories are relatively high or low, EIA said it uses the average inventories for that same week in each of the previous five years. Relatively low inventories heading into winter months can put upward pressure on natural gas prices. Conversely, relatively high inventories can put downward pressure on natural gas prices.

Net natural gas exports are on the rise. From January through June, U.S. net natural gas exports averaged 4.1 billion cubic feet per day (Bcf/d), more than double the average net exports in 2018 (2.0 Bcf/d), according to EIA. The United States became a net exporter (exported more than it imported) on an annual basis in 2017 for the first time in almost 60 years.

The United States exports natural gas by pipeline to neighboring Canada and Mexico and exports liquefied natural gas (LNG) to several other countries. Much of the recent increase in total exports is a result of more LNG facilities coming online. Total U.S. exports of LNG through the first half of 2019 were 37 percent higher compared with the same period in 2018.

Alex Mills is the former President of the Texas Alliance of Energy Producers.