Just prior to 2008, shortly before the United States financial collapse, gas was in the range of $13 dollars; a far cry from the low price that gas sunk to last week. At $2.30 per 1,000 cubic feet, pricing has pushed some operators, like Colorado-based QEP to stop production in dry gas plays across the United States, abandoning their wells to grind through the slope in the market. “Trying to survive will not work, operators have to continue to thrive with low gas prices. It is the only successful strategy,” said Steven Mueller, President and CEO, Southwestern Energy. Although dry gas isn’t favoring well, the demand and the price of natural gas liquids continues to do well in domestic as well as export markets. During CERAWeek, gas operators and market enthusiasts shifted from the previous day’s oil conversation to the growing role of natural gas, supply and demand as well as market trends and pricing.
Sentiment was unanimous among attendees who hailed natural gas as an American national treasure, with long-term low price implications. Our nations abundance of natural gas, many agreed, gives America a strategic advantage to set global pricing for the commodity. Natural gas has been so successful largely because of the advancements made in technology provided by companies like Baker Hughes, who continue to refine processes and instrumentation across drilling and evaluation, competitions, production and reservoir analysis.
“The pace of change is unprecedented. No matter how you cut it, this is an independent company game, and it is the independents and their entrepreneurial spirit that is making the most of technology to drive efficiency,” said Derek Mathieson, President of Western Hemisphere Operations for Baker Hughes. It is because of this efficiency and new technology, connected to a 40 percent surplus of feedstock that has led to depressed natural gas prices in the United States. “There is also a disconnect between oil and gas prices that creates added cost pressures as gas prices decrease,” said Mueller.
Even as operators re-locate rigs into plays rich in oil and NGLs, there will still continue to be demand for dry natural gas. While it is still too soon to tell when the shift in drilling will balance out the dry gas markets, Southwestern’s Mueller reasoned that, “Demand will be sideways for three months and then we should see the demand curve rise again,” and predicting that Americans could see pricing between four and six dollars per million BTUs.
With an unprecedented amount of gas resources at our fingertips, the promise of low prices and a real long-term fuel alternative to oil, state governments are exercising their rights to offer tax incentives to operators as well as to impose regulations on drillers coming into their states. “We have primary authority over our injection wells and high pressure pipelines that is much more forward leaning than the federal government’s,” said Republican Ohio Governor, John Kasich, “Ohio can regulate our own work on the ground and we can get it right for our state.”
Colorado Governor John Hickenlooper mirrored Kasich’s sentiments adding, “It really doesn’t matter what type of energy it is, it should be a state’s responsibility to impose policies and regulations that are less onerous and more effective for its conditions than those the federal government could impose.” Hickenlooper, a former geologist, the only Governor in history to hold the title, emphasized that there is a real need for understanding the geological make up of each state and how that geology transforms the landscape of drilling, extraction and recovery as it pertains to environmental regulations and a basic understanding of the risks associated with oil and gas drilling. “Public relations issues are what is holding up development, which is intrinsically linked to national security in this country,” said Hickenlooper.
“Unless a domestic energy policy becomes a priority, an independent energy policy created by individual states will be critical to their economic development,” said Kasich. The unemployment concerns are real to the Ohio governor whose constituents in small towns around the state are facing multi-generational depressions. “We’ve gone from 10 percent unemployment down to 7.7 percent. I believe we can have strong environmental regulations coupled with important job creation,” said Kasich, “I’m glad environmentalists are engaging. If we pay attention to legitimate environmental concerns I think we can continue to support the oil and gas industry responsibly and carefully, in turn helping the people of Ohio.”
Both Ohio and Colorado have been working hard towards long-term energy development plans, which include conservation and the growth of all energy resources available in their states. Colorado like Ohio has a balanced energy mix with excellent wind and solar resources as well as sizable coal deposits. What is fast becoming an economic and energy wild card for these states, however, is the estimated amount of oil and natural gas reserves available to them.
With the availability of natural gas also comes the reality of how it is extracted and the impact that area will sustain during the course of the wells production. Luckily as technology for horizontal drilling has improved, it has allowed multiple wells to be drilled from a single pad site, reducing the environmental footprint a company leaves once drilling is completed. What is more concerning to each of the governors is ensuring there is wellbore integrity to eliminate fear of water contamination as well as purging unnecessary flaring.
As Kasich continues to increase economic growth in communities through oil and natural gas by reducing any environmental issues, he stressed how important it is for his state to reassess the its current severance taxes. With only a slight increase of the tax the state stands to retain millions of dollars in revenue. “Increasing the severance tax is one of our long-term development plans to lower the income tax, which is the engine that grows small business,” said Kasich.
Meanwhile, Hickenlooper is working with state, industry and environmental leaders in Colorado to glean a clearer understanding of the true environmental threats and risks to the states air and water resources. While he is focused on eliminating fugitive methane and flaring, his most recent initiative will start early next week as the Rocky Mountain Association of Environmental Professionals meet to discuss Colorado Oil and Gas Association’s (COGA) Voluntary Baseline Groundwater Program, which will require operators to establish a baseline of nearby water sources to adequately assess whether an area has increased levels of biogenic gas prior to drilling or if thermo genic gas has been leaked during any part of the drilling process.
It is sure however that the process will continue as the United States forges ahead in shale gas development. Extracting and developing this unconventional resource has faced its fair share of challenges but it has helped shape the industry, leading them to new technological advancements that are redefining the way the industry and hopefully the public, views the process of production.