Natural Gas Oversupply Drives Down Prices

Morning Edition:

"Historically, this has always been kind of a self-governing mechanism," Ricchiuti says. "When natural gas prices got too low, you'd start to see the industry lay down rigs until prices went back up again, and it was very effective. It was sometimes jokingly referred to as the 'Redneck OPEC.' "
OPEC refers to the Organization of the Petroleum Exporting Countries, a grouping of the world's major oil producers.
That's not happening this time, and Ricchiuti says there are a couple of reasons the industry isn't responding as usual to price pressures. One reason is that during the shale gas explosion of the past few years, production companies spent big bucks leasing mineral rights in vast shale gas areas from Pennsylvania to Texas.
Joe Averett lives in the middle of one of those areas, the Haynesville Shale in northern Louisiana. The oil and gas industry veteran says drilling continues there because many of the three-year leases will expire soon if the producers don't drill.
"They're still drilling wells just to hold the lease, and them having to do that, that's continued the excess production," Averett says.
Averett says it's not unusual for gas production to outstrip demand at this time of the year, as stocks begin to be built for the next winter. Today, there's dramatically more produced than consumed, he says, and that has him worried.

"I think there's a reasonable chance [we] will fill up the storage this year," he says.
Averett knows a lot about storage. He's retired now, but his company, Crystal Gas Storage, built some of the huge salt-dome caverns for natural gas in Texas and Louisiana.
Ricchiuti cites one more reason production continues despite the low natural gas prices.
"About a third of all natural gas wells have a certain amount of what we call natural gas liquids," he says, "that could be propane or butane, things like that. And that's very valuable."
In fact, it would make economic sense for producers to keep pumping even if the natural gas price goes to zero.
Fred Callon, a small independent producer based in Mississippi, says that same logic holds for some of his crude oil wells in the Permian Basin in Texas.
"Our projects out in the Permian Basin, of course, are driven by the crude oil prices, and to the extent that they have associated gas, then that is sold, and so there is new natural gas coming to the market," Callon says.

I really don't understand the oil and gas industry.  These guys are bidding like crazy for drilling rights, then producing so much they are crushing prices.  What the hell? 

Even with the currently extremely low prices, I figure eventually gas production will plateau, while natural gas power plants, and maybe natural gas vehicles will come on line, and natural gas won't be cheap anymore.  That may be ten years down the road, but hey, back in 2005, people were anticipating the U.S. would be soon importing natural gas.  I don't trust most prognosticators.