Too Much of a Good Thing

There is no shortage of natural gas in the United States. This, however, is not always a good thing. Since 2012, when the ‘shale boom’ took off in the United States, there has been little concern over the lack of natural gas to be extracted. In fact, production has risen exponentially since the first unconventional wells were drilled, translating to massive economic gains for up, mid-, and downstream development. The surplus of gas does come with consequences; one of which is low prices.

Pennsylvania’s production of natural gas is booming with 2018 proving to be a record-setting year with the highest production numbers in the state’s history. Pennsylvania is not alone, as other states with shale basins, such as Texas, are setting record-high extraction numbers of their own. However, this surplus has driven down gas prices, leaving natural gas companies in a financial conundrum. While cheap gas may be good for consumers, these low prices reap havoc on extractors.

Natural gas reached a ten-year high of $6.91 per one million btu on the Henry Hub Index in 2010, and has consistently fallen since. At its lowest in the past ten years, gas was sold at $1.75. It is now priced at $2.55 per one million btu, but is poised to continue falling. From 2018 to 2019, the price of natural gas has fallen by 21.54 percent.

Decreased sales revenue, regardless of production, poses issues for natural gas companies trying to cover the massive expenses associated with extraction. Many companies have sold wells and other assets to smaller outfits to lighten the overhead burden.

While those opposed to the natural gas industry may be happy with a slowdown, the decline of natural gas poses other issues for environmentalists. If extraction companies go under, who will pay for plugging abandoned wells? Natural gas companies are mandated to bond, or insure, wells as part of the permitting process. The bonds are in place to cover expenses, such as plugging abandoned wells, if the owner of the well does not do it at the end of a well’s life. While regulations vary by state, bonds of $100,000 to $250,000 per well are not uncommon. Some believe that this amount is far too little, and the cost plugging these wells could trump the amount covered by the bond, leaving questions as to who would pick up the tab. However, if a natural gas company does indeed file for bankruptcy, the bond remains, and other means of payment, such as asset forfeiture, will be taken.

While it is still uncertain whether there will be a downturn in the gas industry, government regulators, and industry officials should be planning for such an event to ensure that all obligations are met.