August 10, 2012
A commentary by Michael Vickerman, RENEW Wisconsin, Director, Policy and Programs:

After skidding below $2.00/MMBtu this winter,
wholesale natural gas prices are now creeping toward the $3.00 mark.
This upward movement is the result of below-normal volumes of natural
gas going into storage for the winter heating season. The latest report,
released August 16th, marks the 16th straight week where injection
volumes lagged significantly behind the five-year average.

Notwithstanding this mild rebound, everyone in the
energy industry, including the traders themselves, knows that
$3.00/MMBtu is well below the cost of producing natural gas, and cannot
deliver a return that can support future drilling efforts. This is
particularly true with shale gas, the so-called “game-changer” that
industry flacks contended would topple King Coal’s reign over the
electricity sector.

High-profile shale gas producers like Chesapeake
Energy are now running out of ways of concealing their financial
distress. Consider the following developments that occurred over the
last fortnight.

  • Chesapeake Energy announced plans to reduce domestic gas production in 2013 by 8%; 
  • BHP Billiton wrote down $2.84 billion on the value of Fayetteville shale gas assets it had acquired in 2011; and 
  • The most recent count of rigs drilling for natural gas in the United
    States is 495, down 70% from the record-setting levels seen in
    September 2008.

“Write down” is a fairly bloodless way to describe
the loss of $3 billion; “carnage” is better at conveying the pain that
now grips the natural gas sector. This begs the question: why are
wholesale natural gas prices still under the $3.00/MMBtu level?

I believe that there are two reasons for this
phenomenon. The first is that energy traders, like virtually everyone
else in this country, are truly convinced that the United States is
awash in shale gas, thanks to a brilliant industry-led public relations
campaign. Lower prices help reinforce the popular belief that cheap gas
will be with us for another century. Unfortunately, federal energy
agencies and universities have also bought into this view of the supply
picture big-time, leaving little room for skeptics and agnostics to
influence public perceptions.

This overarching belief has been unintentionally
reinforced by local and regional controversies over the practice of
hydraulic fracturing solid rock to obtain the shale gas trapped inside.
Virtually unheard of four years ago, “fracking” has vaulted into the
public consciousness, and in doing so, sustains the society-wide belief
that natural gas can be accessed almost anywhere in the United States.

Ironically, the myth of abundance that E&P
companies so carefully cultivated–and bankrolled–is now clearly
working against their short-term interests.

The other factor that keeps prices so low is the
traders’ fear of large demand swings. For example, the phantom winter
of 2011-2012, which cut demand for heating fuel by more than 25%,
creating a colossal oversupply that sent wholesale prices crashing. The
supply pendulum is now swinging the other way, and more than half of
the bulge has melted away. Assuming a continuation of smaller-than
normal injections, natural gas inventories should be in line with the
five-year average by mid-December.

Traders attribute the ongoing reduction in inventories
to a hotter than normal summer, prompting utilities to switch on more
gas generators to meet system peaks. But weather isn’t the only thing
that influences the storage picture; output does as well. But as long as
traders and speculators subscribe to the myth of nearly limitless
supply, they will discount the possibility that declining output is also
responsible for lagging storage volumes.

The paradigm shift ushered in by the fracking
phenomenon won’t go away easily. But in the not-very-distant future, the
reality of reduced drilling activity and capital spending, along with
rapid decline rates in shale gas plays, will bite deeply into natural
gas supplies and cause yet another overturning of expectations in this
sector. For electric utilities as well as end-users, the results will
not be pretty.

Michael Vickerman is program and policy director of RENEW Wisconsin, a
sustainable energy advocacy organization. For more information on the
global and national petroleum and natural gas supply picture, visit “The
End of Cheap Oil” section in RENEW Wisconsin’s web site: These commentaries also posted on RENEW’s blog: and Madison Peak Oil Group’s blog: