Despite enthusiasm in Washington and around the country for natural gas as a cleaner, more abundant fuel source, low prices are forcing mid-sized producers to slow down production, sell off acreage, or shift their focus to more profitable oil shale plays. Expectations for policy driving demand increases, either at the federal or state level, have also not materialized, leaving much of the industry in the position of waiting for a price rebound. In this Energy and Climate Brief, Garten Rothkopf examines the state of the current natural gas market, the prospects for increased demand and the overall outlook for the industry.

While natural gas has received significant attention on the Hill thanks to its competitive price, plentiful domestic supplies, and low emissions profile, underneath this new enthusiasm lies a stark market reality. Low natural gas prices are cutting into developers’ margins - forcing many mid-sized companies to either slow-down production, sell acreage to cash-heavy super majors or shift operations to emphasize higher yielding oil shale plays. While an increase in domestic demand would likely push up the price of natural gas and jump-start development, there are currently no policy or secular market trends that would drive this outcome. With analysts anticipating a medium-term natural gas price lull - North American market dynamics have transformed, creating new openings for acquisitions while also spurring a shift into oil shale due to its higher price premium.  In today’s GR Energy and Climate Brief, Garten Rothkopf will analyze the state of the current natural gas market, the prospects for increased demand and the outlook for the industry.

Low North American Natural Gas Prices

Known for its price volatility, the North American natural gas market enjoys a level of liberalization vis-à-vis the EU and Asia, and consequently is very sensitive to slight changes in supply and demand.  Thus, increased natural gas production, high levels of natural gas storage, and a slowdown in consumption following the financial crisis have been accompanied by a four-year depression in North American natural gas prices.  According to Bill Gwozd of Ziff Energy, the trend is likely to continue “in the short term - the next five to ten years - there will most certainly be a gas glut.” As of publication, natural gas prices were a full 19 percent lower in the fourth quarter year on year.

Interestingly, only five years ago, before shale gas production was ramped up, analysts had anticipated rising natural gas prices and a need for increased LNG imports to meet demand. Now several companies are moving to construct LNG terminals with the intention of exporting natural gas to Asian and European markets, including: Freeport LNG terminal in Texas, Sabine Pass and Cameron LNG in Louisiana, and the Kitimat facility in Canada's British Columbia. While shale gas has fundamentally changed the natural gas market, it has also had some unintended consequences for developers: natural gas prices are so low that developing acreage in some formations has become unprofitable. Domestic natural gas rig counts are down to their lowest level in more than a year, at 899.

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