Suddenly, US producers of oil and gas have to worry about market development. Their industry can produce more natural gas than the market needs. They need the market to expand.
This is unfamiliar territory. Of course, producers always have had to sell gas. And their industry groups traditionally promote gas use. But the pressure to open new markets for gas has become extreme. The excess of potential deliverability over consumption is large and seems destined to linger. The condition is evident in gas prices that are very low relative to oil despite rising demand. It gives producers good reason to talk about displacing coal in power generation or oil in transportation. But they should tread carefully.
The reinvigorated need to develop gas markets comes from a surge in supply—more particularly, potential supply—from unconventional resources: coalbed methane, low-permeability sands, and shales. While tight sands continue to lead those categories in production, shales dominate the supply outlook as producers adapt essential completion, drilling, and reservoir-characterization technologies to a complex variety of challenging but voluminous reservoirs.
Because of the shale boom, gas production in the US is increasing faster than demand and now tops that of formerly world-leading Russia. Although the US remains a net importer of gas, exports are rising while imports decline. The potential for production growth is great in aerially expansive plays in which the constraint is less geology than drilling economics applied to wells with strongly front-loaded production curves. At least for now, supply can respond quickly to any new increment of demand that becomes evident in an elevation of price.
Meanwhile, the unusually deep price discount of gas to oil has skewed shale drilling to liquids-rich resources such as the Eagle Ford shale in South Texas and Woodford shale in the deep Anadarko basin of Oklahoma. Some of the gas-price weakness comes from supply entering a surfeit market from drilling compelled by imminent lease expiration. While that pressure eventually will ease, a growing inventory of drillable shale wells means plenty of gas available on demand. The market has room to grow.
As business people, producers need to help it grow. For their new forays into market development, though, warnings are in order:
• The market should determine new and expanded uses for natural gas. Producers should resist the temptation to seek governmental measures to help gas compete with other fuels. Fuel choice by governments distorts markets and creates dependency on political favors. Gas will fare better over time without that kind of help.
• Claims about environmental benefits must be realistic. Yes, methane emits less carbon dioxide than other hydrocarbons do when burned. It's also a greenhouse gas more immediately potent than CO2 as a warming agent. Because gas operations inevitably leak methane, a focus on the burnertip doesn't tell the whole story about relative environmental advantages. Drilling opponents will spring that trap when they think doing so helps their cause. Gas producers can defuse the bomb by putting those "clean-burning" claims in the broader context of overall warming precaution. Gas will still look good.
• Gas must complement and therefore coexist with other energy sources. Efforts to promote gas into transportation markets solely on the basis of its not coming from outside the US, or into an expanded role in power-generation just because it's not coal, will backfire economically and politically. Abundant, low-cost, and—yes—clean natural gas will expand naturally in markets that value its advantages most. Producers will profit most if they keep messages positive and confine marketing to prospective customers rather than politicians.
Another hazard looms. Shale gas, notwithstanding its impressive geologic potential, faces physical constraints such as pipeline and fracturing capacities, water logistics, and local politics. At the beginning of a boom, exuberance can obscure such limits and create supply promises that prove impossible to fulfill. Especially with energy, economics and politics punish supply failure. This is the best reason to leave development of gas markets in private hands.
More Oil & Gas Journal Current Issue Articles
More Oil & Gas Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com
