US E and P Firms to Lower Gas Production as Surplus Causes Price Drop

The price drop in US natural gas caused by last year’s overproduction is encouraging power generation companies to switch from coal to gas, according to analysis released by business intelligence provider GlobalData.
 
However, their analysis indicates that the reaction of a number of E&P companies in the US to the price drop is to focus on drilling in oil or liquid-rich areas while natural gas prices remain unattractive. 
 
Natural spot gas prices fell from $4.54 per MMBtu on January 3, 2011 to just $2.05 per MMBtu at the Henry Hub as on April 27, 2012. This drop in price has been attributed to an over production of natural gas in relation to market demand.
 
The current low price for natural gas is expected to drive an increase in gas consumption, especially in power generation and industrial sectors over the next couple of years, assuming there are no major changes to residential or consumer gas consumption levels.
 
The low cost of gas, in combination with its lower carbon content, has seen a number of energy generation companies state intentions to replace coal-based thermal power plants with their gas-burning counterparts. Companies like Xcel Energy Inc, Calpine Corp and Progress Energy Inc. have all announced plans to close down or convert coal-fired plants in favour of gas alternatives.
 
The low price of natural gas is also affecting the petrochemical industry, with companies switching to gas from naphtha, a relatively expensive oil-based feedstock. Dow Chemical Company and Shell Chemical, amongst others, have plans to invest in the US’s petrochemical capacity in order to take advantage of the country’s natural gas resources.
 
To counter the drop in US natural gas prices, several US E&P companies are moving away from shale gas production, with the national number of gas rigs reduced by 11 to 627 on April 2012. However, the number of oil rigs in the US has increased by 11, bringing the total figure to 1,329.
 
This slash in US gas production in 2012 will mark a reduction of about 2.6% on 2011 levels, with GlobalData analysis indicating the possibility of a further decline of 0.5% to 1% over the next couple of years.

Source: Globaldata