Are natural gas suppliers purposely overproducing?

On December 27, 2013, Matt Wald published a piece in the New York Times titled New Energy Struggles on Its Way to Markets that points to the predictable consequences of having too many energy options chasing too few customers.

When there is excess supply compared to demand, prices tend to fall rather dramatically. Falling prices result in some suppliers being forced to either stop selling or to sell their product for an amount that is less than production cost.

Eventually, markets balance out as weaker suppliers are driven out, reducing both production and production capacity. Lower prices lead to increased demand and shifts in market share to options that seem to meet customer needs at a lower cost. The oversupply situation disappears and price begin to climb back to a more profitable level.

The cycle may continue, but only after a profitable period when supply does not quite match demand and prices soar high enough to encourage new competitors with new financial backers. There is nothing magical or original about these statements; they are fundamental concepts taught in both Economics 101 and Business Mangement 101.

In the economics courses, students often learn about the ideas as uncontrollable trends predictable by statistical analysis of soulless markets. However, in the business management courses, students learn that they will be responsible for taking actions to do whatever they can to influence both supply and demand in order to best position their enterprise for success. They learn how to market products to push demand to higher levels and they learn techniques for predicting demand and managing production to prevent inventory overhang and price-damaging gluts.

They also learn that it is sometimes beneficial to their long term success to put their products “on sale” at prices that are temporarily unprofitable. By holding sales events with marked-down prices, they stimulate new demand, weaken their competitors, and capture market share. Repeated sales events can help to drive some under-capitalized competitors out of business; that means more market share and the opportunity to allow prices to rise a more profitable level for a while.

It is that context that I have suggested to colleagues and writers like Matt Wald that there is a distinct possibility that low natural gas prices are less accidental than they seem most observers. As Wald pointed out in the conclusion to his article:

It is not clear how this struggle will play out over the next few years. At the moment, according to Mr. Webber, natural gas is so cheap that it is stunting construction of even new plants that would burn natural gas.

The people who operate the large, multinational commodity enterprises that supply natural gas in the United States are run by people who did very well in their business courses — including “courses” taught in the school of hard knocks by surviving in the day-to-day market. Those business leaders have worked hard to learn how to use the law of supply and demand to the benefit of their enterprises.

By pursuing horizontal drilling and hydraulic fracturing technology as rapidly as possible, gas suppliers have successfully lowered the price at which they are selling their fuel to a level that is unprofitable for most of their less heavily capitalized competitors. Since most gas extractors also extract oil, they have been able to finance their unprofitable gas operations from the healthy profits obtained by selling liquid petroleum at prices that are five times as high today as they were a dozen years ago. Other gas extractors have financed overproduction by convincing others that their newly discovered resources are worth paying five to ten times as much for leases as before the boom.

The long-running natural gas sales event has been working in the same way that sales events normally work. More customers are being attracted by the seductive pricing. They are building infrastructure that will take advantage of current natural gas prices, but that infrastructure will lock-in continued purchase of their chosen fuel option. Natural gas competitors are being weakened by being forced to either stop selling or to sell their product at prices that provide little, no, or negative margin above cost.

Though it might seem to some observers that all energy competitors other than natural gas are being hurt — or targeted — by the gas oversupply situation, it is might be useful to note that many gas companies are heavy investors in wind, solar and biomass projects, that they politically support generous financial incentives for those power sources, that they often form political alliances with unreliable renewable energy suppliers, and that they realize that unpredictable power supplies from wind and solar lead to the need to provide “firming” using the most responsive option available — which, as they have repeatedly informed us all — is natural gas.

Coal is an obvious target because it already has a large market share and it has numerous drawbacks that are easy to attack. In fact it is so unpopular that natural gas advocates have declared a war on coal and have openly participated with financial support for efforts like the Sierra Club’s Beyond Coal campaign.

It might also help to use the magic of archival searches to recall the optimism about the nuclear renaissance as exemplified by another Matt Wald article from 2007 titled Energy Bill Aids Expansion of Atomic Power. Back before the “shale gale” and the long running economic recession with its anemic recovery, major publication were producing paragraphs like the following about the potential for nuclear energy growth in the United States.

But the provision has the potential to considerably expand the nuclear industry, which plans to build 28 new reactors at an estimated cost of about $4 billion to $5 billion apiece. And while the nuclear industry would be the biggest beneficiary, the provision could also set the stage for billions of dollars in loan guarantees for power plants that use “clean coal” technology and renewable fuels.

The nuclear industry is enjoying growing political support after decades of opposition from environmental groups and others concerned about the risks. An increasing number of lawmakers in both parties, worried about global warming and dependence on foreign oil, support some expansion of nuclear power.

Each large nuclear plant produces as much energy each day as 200 million cubic feet of natural gas burned in an efficient combined cycle gas turbine (CCGT) plant. When there was a prospect of 28 new plants — with many more to follow if those plants were successful — the natural gas industry was facing the prospect of permanently losing a lucrative market for their product. The initial loss upon completion of 28 new nuclear plants would be about 3 billion cubic feet per day, and that number had the potential for substantial growth.

Is it really surprising that there has been an almost non stop effort since 2007 to teach us all that natural gas is clean, cheap, and abundant and that climate change is not as worrisome as it seemed to be? Should it surprise anyone to learn that George Mitchell, sometimes called the father of fracking, endowed a foundation that provided hundreds of millions of dollars to support programs like natural gas sustainability marketing.

For some odd reason, when I point out that energy business leaders learn early in their training programs that the law of supply and demand is something they need to understand so that they can control its effects on their businesses, people often accuse me of being a conspiracy theorist. Why?

What is so strange about pointing out that most businessmen are in business to make as money as they can as fast as possible, even if it hurts others, damages the long term health of the atmosphere, reduces the oceans’ ability to produce food, and results in the ever increasing risk of major conflicts over control of natural resources.

PS – It is worth noting that Bloomberg commodity market reports indicate that the natural gas sales event may be coming to an end. The current price of natural gas for delivery in Feb 2014 is nearly $4.37 per MMBTU. That is a 76% price increase since February 2012.

About Rod Adams

30 Responses to “Are natural gas suppliers purposely overproducing?”

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  1. James Greenidge says:

    Seasons Greetings and Happy New Year All!

    Good educational article. Wish the media were as perceptive!

    My New Year’s Atomic Show wish-list is a roundtable interview with the owners of the top ten nuclear blogs on the subject of their treatment by the mass media, why are antis so successful, Anti-FUD media campaigns, and how to get all the excellent points of their features out into the public to get things nuclear moving! My runner-up wish list is to corral a line-up of Who’s Who in pro-nuclear Congresspeople and pols and even interview one. Since Rod hasn’t mentioned being contacted by one, that means my mass e-mail invitation to the Hill to comment on Atomic Show got shrugged or trashed in their offices. My second runners-up Atomic Show wish list is interviews with pro-nuclear Japanese blogs and how they’re handling educating the public over their in the wake of Fukushima and how we might support them. My third runner-up Atomic Show request is a roundtable with the heads of ANS, NEI and IEAC and NRC on nuclear policy and cluelessness of public nuclear opinion. Fourth runners-up is a media grill session with Atomic Show regulars and any members of the 4th Estate gutsy enough to come on to explain nuclear power’s constant trashing and maligning and and smearing in the media and so-called “science” shows (as re Prof Kaku) and school textbooks and unabashed open wind/solar-favoritism. Are there any REAL media “science editors” anymore??

    Keep up the Great Work keeping the atomic flame alive!

    James Greenidge
    Queens NY

  2. Daniel says:

    Charles Barton said that a consequence of fracking was the creation of potential in situ recovery Uranium mines.

    Is this true and what is the magnitude ?

    Nice by product potentially.

    • Rod Adams says:

      @Daniel

      I don’t think the potential is very high right now. The chemicals needed for dissolving uranium don’t seem to be part of the fracking fluid mixtures I have seen. The people that own the wells don’t have any real desire to mobilize the uranium. The price of uranium is currently less than it was in 1970 using nominal dollars with no inflation adjustment. In other words, the world market is well supplied right now.

      • mike says:

        Of course they don’t want to mobilize the uranium as long as they don’t want to harvest and sell it. -But the concentration of fissile elements in the drilled shales should easily be shown by the radium reading of the gas.

        • Engineer-Poet says:

          Given that the major objection to a new gas pipeline to Manhattan was that this gas came from fracking and was loaded with radon, it appears that those shales may indeed be good uranium resources.

          • Rod Adams says:

            @EP

            I’m not denying the presence of uranium in the shale. I think I once wrote about an evaluation of Marcellus for uranium mining.

            Under current market conditions, however, it’s not a likely or needed source of nuclear raw material.

          • Engineer-Poet says:

            It’s a good counter-argument to people who claim that a nuclear USA would be hostage to foreign uranium suppliers.

          • Rod Adams says:

            @Engineer-Poet

            Before the US is held hostage to foreign uranium suppliers and before the shale resources are economic, perhaps we can tap the 119 million pound deposit that is virtually in my backyard. Right now, it is not legal to mine uranium in Virginia, a state that is home to about 150 coal mines and numerous other metal and rock mines. The critics claim to be worried about safety. I don’t believe they have any basis for their concern, other than fear of competition for the coal mines.

          • mike says:

            Radon of course. -thanks (I must have been tired).
            To your comment about the Radon in pipeline-gas I want to mention an other interesting point: In Europe there is also more radon emitted by oil and gas bore holes per year than alpha.emitters by the hole nuclear industry including the big reprocessing facilities in Lahague and Sellafield.

  3. Eino says:

    Natural gas is gaining a foothold in transportation with people like Pickens pushing it along. Does that have the possibility of creating a more balanced supply demand situation for natural gas? I would think increased demand from alternate uses such as transportation would increase the price. It would also increase market share for the gas producers.

    • Pete51 says:

      Transportation use of natural gas will increase demand a little, but I think the export market is potentially larger. Natural gas is much more expensive in Asia and Europe, and US suppliers want to arbitrage the price difference. LNG export terminals are being built.

      • Engineer-Poet says:

        The market for motor fuels in the USA (gasoline and distillate [diesel]) is nearly as large as the market for natural gas.  Conversion of the vehicle fleet could wipe out the NG exports and slash petroleum imports within half a decade.

        • Pete51 says:

          Conversion of the vehicle fleet could wipe out the NG exports and slash petroleum imports within half a decade.

          “Could” being the important word in that sentence. I was thinking more in the short/medium term (a decade or so). Longer term, the US might get its energy act together, start building dozens of new nuclear stations, phase out coal, and use natural gas for transportation. On the other hand, the US might not.

      • Rod Adams says:

        @Pete51

        US exports to our neighbors are rising faster than most people understand.

        See, for example – http://www.eia.gov/dnav/ng/hist/n9132mx2m.htm

        • jaagu says:

          US gas production was about 30 trillion cubic feet in 2012.

          Gas export to Mexico was about 600 million cubic feet in 2012.

          That means we exported about 0.2% of our production to Mexico in 2012.

          ———————-

          In 1999 we exported about 60 million cubic feet to Mexico.

          In 1999 US gas production was about 24 trillion cubic feet.

          • Rod Adams says:

            @jaagu

            You are missing a few zeros in your figure of exports to Mexico.

            According to the Energy Information Agency, gas export to Mexico in 2012 was more than 600 billion cubic feet. More precisely, it is listed in this table as 619,802 million cubic feet. http://www.eia.gov/dnav/ng/ng_move_expc_s1_a.htm

            That number is not standing still; 2013′s total is running about 30% higher than the same period from 2012.

            From Energy Information Agency (December 30, 2013) Mexico Week: U.S. is Mexico’s primary energy trade partner amid shifting trade dynamics (http://www.eia.gov/todayinenergy/detail.cfm?id=14391)

            Natural gas and liquefied natural gas: Mexico’s domestic natural gas consumption is rising faster than domestic production, leading to both record pipeline gas imports from the United States and growth in the country’s imports of liquefied natural gas (LNG). Natural gas trade between Mexico and the United States has been growing; estimated average daily net exports from the United States to Mexico so far in 2013 (January 1-May 6) has been 1.6 Bcf/d, up almost 29% over the same period in 2012. Many potential new natural gas pipeline connections between the two countries are planned. Pemex subsidiary PGPB imports most of the natural gas that enters the country via pipeline. In addition, private entities and state electric commission CFE also import pipeline gas into Mexico. In 2006, Mexico began importing LNG shipments from the Gulf of Mexico at its Altamira regasification terminal, and in 2008 began receiving LNG on the Pacific coast at its Costa Azul regasification terminal. Mexico has considerable natural gas resources, but the development of its unconventional shale gas is proceeding slowly.

            Your figure for US gas production of 30 trillion cubic feet (TCF) in 2012 is “gross production”. More than 10% of that number is reinjected to maintain reservoir pressure, some is flared, some is non combustible gas that needs to be removed. Total “marketed production” in 2012 was 25.3 TCF.

            http://www.eia.gov/dnav/ng/ng_prod_sum_dcu_NUS_a.htm

    • Engineer-Poet says:

      IMO, Pickens was half right.  He proposed wind to displace gas, and gas to displace petroleum.  He should have suggested nuclear to displace gas instead.

    • Jim Baerg says:

      There are also some companies like this one:
      http://www.gastechno.com/
      pushing new & cheaper ways of converting natural gas to liquid fuels.

  4. Steve Foster says:

    It can appear that a small group of influential participants in the marketplace are acting as part of a conspiracy without it actually being a conspiracy. All it takes is common, shared financial self-interest for smart greedy people to engage in similar actions toward a unified goal – making as much money as possible. Shared interest is enough to cause various actors to behave as if executing a covert plan, even though such a plan doesn’t exist.

    Tossing charges of Conspiracy Theorist is really a transparent attempt to discredit the messenger.

  5. Eino says:

    “US exports to our neighbors are rising faster than most people understand.”

    Just a side note – One of the contributing factors to World War II was when the US cut off oil exports to Japan. From Wikepedia, “Causes of World War II”

    “President Roosevelt chose to freeze all Japanese assets in the U.S. The intended consequence of this was the halt of oil shipments from the U.S. to Japan, which had supplied 80 percent of Japanese oil imports. The Netherlands and UK followed suit. With oil reserves that would last only a year and a half during peace time (much less during wartime), Japan had two choices: comply with the U.S.-led demand to pull out of China, or seize the oilfields in the East Indies from the Netherlands.”

    I guess you can have oil wars whether you are a buyer or seller of limited fuel supplies. I hope someone is looking over the gas folk’s shoulders to ensure the US remains with an adequate supply. Cheap gas here can help kickstart our economy.

  6. John Tucker says:

    In support of the low pricing pressures to get everyone hooked on the market side I think gas has been written into the Government side of plan since the mid 2000′s:

    National Action Plan for Energy Efficiency Vision for 2025 ( http://www.epa.gov/cleanenergy/energy-programs/suca/resources.html )

    For instance, from the PDF:

    A PLAN DEVELOPED BY MORE THAN 50 LEADING ORGANIZATIONS IN PURSUIT OF ENERGY SAVINGS AND ENVIRONMENTAL BENEFITS THROUGH ELECTRIC AND NATURAL GAS ENERGY EFFICIENCY.

    … Uncertainties in future prices and regulations raise questions about new investments. New infrastructure is being planned in the face of uncertainties about future
    energy prices. For example, high natural gas prices and
    uncertainty about greenhouse gas and other environ­mental regulations, impede investment decisions on new energy supply options…

    It was very clever of them to put that in there.

    …Timely cost recovery in place. A basic require­
    ment for the elimination of disincentives to energy
    efficiency programs is establishing a fair, expe­
    ditious process for recovery of costs. Failure to
    recover program costs directly negatively affects a
    utility’s cash flow, net operating income, and earn­ings.
    Further, lack of timely cost recovery increases
    regulatory risk and requires the utility to incur car­rying costs….

    That sounds harmless but in there is a disincentive to long term financed solutions.

    Somehow that became the foundation of the EPA clean energy plan and its really no wonder Fracking and waste disposal got a blank cheque and thinks like methane leakage were completely overlooked.

    • John Tucker says:

      So you can honestly say. Without any irony or embellishment : “Our national environmental program and energy efficiency plan were written by and for natural gas.” Because it was and as much says so in it.

      Obama kept the Bush plan in place (and hired two anti nuclear directors at the NRC for good measure). You couldn’t make this stuff up.

  7. mjd says:

    “Are natural gas suppliers purposely overproducing?”
    If it looks like a duck, walks like a duck, talks like a duck….

  8. Eric_G says:

    Playing devil’s advocate…

    http://www.nbc11news.com/home/headlines/Encana-announces-major-workforce-cuts-230906191.html

    No new Piceance wells for Encana in 2014:
    http://www.postindependent.com/news/9318046-113/encana-gas-drilling-hock

    At the end of the day the drillers are still subject to the price on the market. The market is a bunch of guys in Chicago and New York who are looking at the reserves of gas and driving the price down. But the drillers aren’t charities, even if they have a dual revenue stream. And once it comes out of the ground it has to go somewhere. With lackluster interest in using nat gas as a transport fuel (aside from specialized applications like city busses), even though it could be as revolutionary as plug in hybrids, the drillers are willing to just maintain pipeline pressure until there’s a market.

  9. starvinglion says:

    Nuclear advocates are running around with their heads cut off.

    This university professor from Britain is of the opinion that new reactor designs are desperately needed because the military in the USA and Great Britain ruined the industry.

    http://www.softmachines.org/wordpress/?p=1424

    • starvinglion says:

      University dreamer demands funds from taxpayer suckers.

      http://www.softmachines.org/wordpress/?p=1417

      “But at the same time we should resume serious research on reactor design. ”

      The phds to the rescue!

      “The aim of this research should be to explore that space of better designs that were locked-out by the military origins of civil nuclear power. ”

      Thats hilarious. Britain needs a nuclear buildout right now and this guy is talking blue sky 100 years into the future.

      “To get moving with a new nuclear program, we should begin a serious design and manufacturing program for light water small modular reactors.”

      Translation: We peed away our heavy machine industry in favor of 100,000 postdocs doing lab scale “innovation” at the university so now we have no choice but small reactors.

  10. Don Cox says:

    Is Natural Gas getting too cheap to meter ?

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