Development of Natural Gas Faces Legal, Technical Uncertainty
Just like any other commodity, the price of natural gas is determined by the laws of supply and demand. Five years ago, the price of natural gas was approximately $13 per 1,000 cubic feet (mcf). This price, which was high by historical standards, created a financial incentive for energy companies to explore new sources of natural gas. Two of the sources discovered were the shale formations known as the Marcellus Shale and the Utica Shale.
As the new supply of natural gas from these shale sources increased (along with a decrease in demand caused by the recession in 2009), the price of natural gas began to fall. Currently, the price of natural gas sits at about $3.75 per mcf.
This decline in price has caused energy companies to look for ways to become more efficient in their drilling efforts. For example, energy companies can now drill a shale gas well in 20 days, a process that took 40 days several years ago. This decline in drilling time saves the energy company approximately $500,000 per well.
Furthermore, energy companies have improved their well design and fracking strategies so that they can recover more gas through each well. Drill pads are now smaller in size and more water is transported through above-ground pipelines, rather than by truck, which reduces traffic congestion and damage to roads.
The increased availability of natural gas, which is an environmentally cleaner energy source than coal, has caused consumers of energy to switch their energy suppliers. Electric utilities are shutting down their coal-fired boilers and converting to natural gas. Chemical companies and plastic manufacturers are bringing operations back to the United States or expanding existing domestic facilities because the price of natural gas is our country is now substantially cheaper than the price of natural gas abroad.
A Look Ahead
Trying to project how the energy market may look five to 10 years from now requires an understanding of both legal and technical factors. Generally speaking, each of the 50 states controls the environmental requirements for producing natural gas within their boundaries. These state-specific requirements vary widely. For example, Pennsylvania and Ohio encourage the development of shale gas by limiting the ability of municipalities to enact local ordinances that impose greater restrictions on drilling than the regulations passed at the state level. Conversely, New York has a statewide moratorium on the development of shale gas, and New York courts have also upheld municipal bans on drilling, which would become effective if the statewide moratorium is lifted.
Technically speaking, development of shale gas continues to evolve. Extracting natural gas from the Utica Shale is still in the research and development stage. We know from experience that developing the Marcellus Shale took about three to four years to get production and costs to their current levels. Further development of natural gas from both of these formation requires additional investment in pipelines to transport the larger volumes of natural gas. Once these pipelines are in place, we will have a better understanding of the levels of production that wells drilled into the Utica Shale are likely to achieve.
Finally, some studies have shown that by the year 2020, the production of natural gas in the United States will exceed our country's anticipated demand for this resource. As a result, plans are underway for numerous liquefied natural gas ("LNG") export terminals to ship LNG overseas. These potential exports may decrease available supply for new or expanded domestic uses, such as increased use of LNG for transportation (long-haul trucks, locomotives, passenger vehicles), and power generation. If demand for natural gas begins to exceed the available supply for domestic uses, the price of natural gas will likely rise.
These are just some of the economic, legal, technical and political influences on the price of natural gas. And although the future cannot be predicted with certainty, one thing is clear: natural gas will remain an important energy resource for Pennsylvania's manufacturers and residents for years to come.
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