Natural Gas: Which Industries (and Lenders) Face the Most Risk? despite Producers' Efforts to Reduce the Flow of Natural Gas, It Remains to Be Seen If the Commodity's Price Will Remain Steady or Drop Again

By Montero, Austen; Danova, Antonio | The RMA Journal, April 2013 | Go to article overview

Natural Gas: Which Industries (and Lenders) Face the Most Risk? despite Producers' Efforts to Reduce the Flow of Natural Gas, It Remains to Be Seen If the Commodity's Price Will Remain Steady or Drop Again


Montero, Austen, Danova, Antonio, The RMA Journal


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THE UNITED STATES has an abundance of natural gas, much of it going unused as consumers and downstream industries increase their consumption of it more slowly than the rate at which it is being produced. This surplus of gas is carrying over from companies that ramped up production in recent years.

As the surplus grows for these companies, they must reduce the price of their product, which creates downward pressure on the overall price. The price declines have led to lower revenue and lower profit margins, making it more difficult for industries working in the natural gas sector to find spare change. All of this begs the question: Which industries, and their lenders, face the most risk?

First, how much natural gas does the U.S. really have? According to a September 2012 report from the Natural Gas Supply Association (NGSA), record levels of natural gas extraction and production stem from a variety of factors, one being the Marcellus Shale. This field of natural gas deposits rests under Pennsylvania, New York, Ohio, and West Virginia as part of the Devonian Black Shale Field. Industry experts estimate this particular gas reserve alone holds at least 50 trillion cubic feet (TCF) of extractable natural gas, but could hold up to 363 TCF--enough to supply the United States for about 14 years. By comparison, U.S. industries extract roughly 30 TCF each year in drill sites across the nation.

Because natural gas is so abundant in this region, industry firms mobilized to increase their extraction rates, leading to a surplus of 3.8 billion cubic feet (BCF) by October 2012, a 5.0% increase over the surplus from 2011. According to the same NGSA report, shale gas production grew 32.5% per day in 2011, to roughly 22.4 BCF. As companies extracted gas but had nowhere to offload it, they slowed production, but the surplus remains. Despite a decrease of 2.1% in daily production in 2012, gas-extraction companies are still operating with high efficiency, adding to the expanding surplus.

On top of this already strong production, skyrocketing prices for crude oil have kept natural gas supplies high. According to Bloomberg Businessweek, crude oil regularly traded above $100 in early 2012, so drilling companies ramped up production to take advantage of the high prices. However, drilling for oil produces gas as a byproduct--and lots of it. Barclays estimates 75% of natural gas production in 2012 is a direct result of oil drilling. Accordingly, as drilling for crude oil increases, there is a larger supply of gas byproduct that helps sustain U.S. natural gas reserves.

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Consumption needs in the U.S. have been satisfied, leaving an excess of natural gas. As a result, the price of U.S. natural gas has generally been falling. In the period from 2010 to 2011, the wellhead price in the U.S. fell from about $4.48 to $3.95 per thousand cubic feet, according to the U.S. Energy Information Association. By April 2012, those prices had dropped to $1.95 per thousand cubit feet.

To offset tumbling prices, industry operators have tried to roll back production to reduce the surplus. It has worked, albeit briefly; natural gas rose to $2.85 per thousand cubic feet, but that price still hovers around historical lows. Because of the physical properties of gas, it is difficult to calculate the capacity of any given natural gas deposit. This means that extraction cannot be fully stopped for fear of damaging extraction and production capabilities in the future. Many mines must constantly extract gas no matter how large the surplus grows, which threatens prices further.

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Despite these efforts to reduce the flow of natural gas, it remains to be seen if the price will remain steady or drop again. And if it does drop, who stands to lose the most?

Natural Gas Risk Model

In a case study projecting the risk of continually declining natural gas prices, IBISWorld profiled three industries: the U. …

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