When it comes analyzing the natural gas industry, counting rigs provides little insight, because rigs may come and go. But production levels are another matter. Over the last five years, for example, rig counts have been volatile, while production has been steady.
According to the Energy Information Administration (EIA), natural gas withdrawals are now averaging approximately 2,300 billion cubic feet per (Bcf) per month. Compare today's volumes with previous years and the stability becomes clear. During 2000-2005, average withdrawals were 2,002 Bcf per month. During 1990-1995, they were 1,887 Bcf per month.
While multidecade production trends are up, it is not a sudden jolt as many have been led to believe. What is changing is how we get the natural gas. Less natural gas is coming from traditional wells. As can be seen in the graph, hydraulic fracturing -- fracking -- is steadily growing to become the second largest source of natural gas.
The reason for this change is simple. Traditional wells in the United States are being depleted. The nation is relying more on fracking and less on traditional wells.
Within the shale gas industry, there has been more volatility than meets the eye. For example, dry shale gas production from Barnett has been declining at a rapid rate.
In fact, production from all but two fields has flat lined or declined. The two exceptions are the Marcellus and Eagle Ford plays, which have been growing since 2009 and continue to grow.
Shale gas plays seem to have relatively short half-lives. In addition, production from any given well falls by approximately 80% within the first 24 months. In order to maintain growth and volumes, producers need to find more sources of shale gas.
Here is the rub. While volumes have been steady and consistent, the U.S. Department of Energy (DOE) wants to mix up the market up by adding new demands. Almost 25% of U.S. natural gas production is slated for export. This could strain supplies and increase prices.
So far, the DOE has approved three liquefied natural gas (LNG) export licenses, with more producers waiting. The first approval was Cheniere Energy Partners (CQP). Later, Sempra Energy (SRE) sought and received approval to export LNG from their Cameron LNG facility.
The DOE's latest license approval was awarded to Lake Charles Exports LLC, a venture between U.K.-based BG Group and Energy Transfer Equity LP (ETE). Lake Charles has approval to ship two Bcf a day for the next 20 years.
Next in line is Dominion Resources (D), which needs to export to recover stranded import assets in Maryland. In all likelihood, DOE will approve Dominion's application.
For natural gas producers and transporters, the DOE's series of approvals are good news. Even companies not involved in LNG will see higher volumes and prices for natural gas.
Producers' gains are likely to be consumers' losses, however. As more U.S. energy is exported, domestic energy prices are sure to move up. New market dynamics are not lost on economists, industrial interests and major consumers.
According to the Wall Street Journal, U.S. manufacturers have questioned the wisdom of allowing unfettered exports. They argue the result could be higher prices at home and less competitiveness for U.S. industrial companies that use gas as a feedstock. Several manufacturers -- including Dow Chemical (DOW), Alcoa (AA) and Nucor (NUE) -- formed a coalition earlier this year to resist the wave of export proposals. "Each permit approval brings us closer to the point that would begin to harm the manufacturing renaissance," the coalition, known as America's Energy Advantage, stated in response to the DOE's latest approval.
It is not just industrial companies that are taking a hit. Utilities, municipalities, commercial businesses and homeowners face substantial price increases as more natural gas is exported. For these consumers, the outcome of higher energy exports and prices could feel like a new tax.
The DOE's export decisions also affect electricity. In many regions of the country, natural gas is on the margin and it sets market-clearing prices. Higher natural gas prices mean higher electricity prices.
Limited exports make sense. However, it can be argued the DOE should proceed with caution based on the principal of creating the greatest good for the greatest number of people. If the department approves too many export licenses at too high volumes, it could end up helping a few companies at the expense of the nation's economy.
