Shale Abundance Keeping Gas Prices Down and Competition Up in the US

So far, the United States has profited from the shale revolution more than any other nation in the world. The country’s supply of shale gas has been on an increase since the 1990s when oil and gas producers began to combine hydraulic fracturing, also known as fracking, with horizontal drilling.


The US also benefits greatly from its expansive natural shale formations, which have allowed most of their shale oil and gas sources to be located domestically. This means that the US does not have to share profits with other nations or contest ownership, allowing them to fully benefit financially from these resources.


In addition to their use as fuel, shale gas and ethane (a natural gas liquid that is derived from shale gas) are also being heavily used as a feedstock for chemical companies in the US, largely due to their wide availability and affordability. According to the American Chemistry Council, almost 300 projects were completed, planned, or initiated in the chemical industry as of March of this year thanks to shale gas.


The current state of shale gas production in the US

The two largest shale gas deposits in the US are currently producing record amounts of the fuel, according to the US Energy Information Administration’s latest monthly Drilling Productivity Report. Production from the Marcellus shale basin in the eastern US is projected to rise to 19.4 billion cubic feet a day this month, a 0.5% increase from June; this is thanks largely to the construction of new pipelines to transport gas to markets in the US and Canada. The Permian reservoir in Texas will see an increase of 1.9%, producing roughly 8.5 billion cubic feet per day.


“Given the current forward curve, U.S. natural gas supply and demand are extremely unbalanced, with total U.S. supply outpacing demand by a staggering 11 Bcf/d by the end of 2019,” said Justin Carlson, VP and Managing Director, Research at East Daley Capital. “Basins like the Rockies, Haynesville and the Fayetteville need to pay close attention to what happens in the Northeast as those tier 2 and tier 3 basins are facing an uphill battle for market share and will most likely need to reduce their growth and earnings expectations.”


What does this mean for natural gas companies?

This significant increase in production from both sources threatens to shift the supply-demand balance in the market, leaving producers with excess amounts of un-purposed or unsold shale gas. Excessive supply would drive down gas prices just as they are recovering from last year’s severe lows—a good thing for buyers and for many projects within the chemicals industry, but not good for producers. If production continues to be abundant throughout the rest of the year, it will worsen the effects of the gas glut in the US.


Carlson added that the country’s natural gas market “is entering into an intense era of gas-on-gas competition where only the best positioned will survive.” Companies engaged in shale gas production and the production of other natural gases can expect a reduction in profits should competition intensify further and supply continue to outweigh demand.


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