Even a “supply deficit” in natural gas by the end of this year isn’t likely to push prices up enough to head off a decline in North American production, American shale gas consultant Arthur Berman writes in a commentary for Oilprice.com.
Berman’s long, heavily technical analysis focuses mainly on the Utica and Marcellus shale deposits in the eastern United States. He observes that thanks to the one-time increase in production capacity that resulted from the introduction of horizontal drilling and fracking technology—and the enthusiasm of investors—North America’s “largely closed” natural gas market has suffered persistent overproduction since 2008. The result is that “real natural gas prices (in July 2016 dollars) have never been lower.”
The surge in production led to “the preposterous belief that U.S. gas supply was almost unlimited, that we had at least 100 years of gas,” Berman writes. “But there never was 100 years of gas.”
The supposed vast reserves, he says, were used to promote the desirability of U.S. gas exports. But in an ironic turn, “conscious over-production reduced the [market] price below the marginal cost [of production], so promoting increased consumption and export became the only ways to increase price.”
Now, with oil prices trapped within “their current range boundaries of about $40 to $50,” Berman predicts that “associated gas [activity] will continue to decline. Even adding 150 new wells per month has not arrested or even slowed the inexorable decline of shale gas production.”
Gas prices have come up, along with oil, since March. But, Berman asks, “will companies show [production] discipline to preserve higher prices? Not a chance. They will drill more wells if investors continue to provide capital.”
That, in turn, would limit any upward pressure on prices—and profit margins—and “probably be too little, too late to stop the decline in gas production that is already under way.”