Price matters


Last winter, the Bureau of Land Management gave its approval to a large natural gas drilling project in northern New Mexico. Under the Middle Mesa plan, WPX Energy would drill and frack 53 shale gas wells on a mesa overlooking Navajo Reservoir over a five year period. The company can drill year-round, too, since the BLM waived all winter wildlife restrictions. Though there are already dozens of gas wells in the immediate project area, and tens of thousands in the greater San Juan Basin, the project was notable. It would have been among the first to delve into the Mancos Shale formation for natural gas,  requiring horizontal drilling and multi-stage hydraulic fracturing, and it would be one of the only major gas drilling projects going forward in the region.

Instead of celebrating the approval with an onslaught of drilling rigs, however, WPX Energy postponed the project indefinitely. The reason? Natural gas prices are just too low, a phenomenon that is sending economic ripples through gas fields, coal mines and energy-dependent communities across the West in sometimes unexpected ways. The natural gas boom has, it seems, fallen victim to itself.

Ripples include:

• La Plata County, Colo., also in the San Juan Basin and also heavily dependent on natural gas-related taxes and revenues, is looking at a $920,000 revenue shortfall due to dropping prices alone. The Ignacio school district is especially worried about impacts to property tax revenues.
• “It’s brutal, and I think the community needs to brace itself for this most recent slowdown,” Jason Sandel, executive vice president of Aztec Well Servicing, told the Farmington (N.M.) Daily Times. “If things remain the same, it’s going to be pretty gloomy here for the next couple of years.”
• The state of Wyoming, whose coffers are perhaps the most energy-dependent in the nation, is facing shortfalls in its budget. Traditionally, energy revenues have helped the sparsely populated state build and staff top-notch schools and have kept other state agencies in good shape.
• Montana’s gas drilling is “more than a little off, it just doesn’t exist,” Montana Petroleum Association director Dave Galt told the Flathead Beacon.
• While natural gas drilling has ground to a halt in most of the West, oil drilling is going gangbusters. Some 1,400 rigs are currently drilling for oil in the U.S., with only 500 going for natural gas.
• Low-cost natural gas is another incentive for utilities to switch from coal to natural gas for electricity generation, dealing a blow to the coal mining industry.

And now, to help us figure it all out, a bunch of charts (all from the Energy Information Administration):

The bottom line of what’s going on is ... the bottom line. Natural gas prices (top chart) shot up beginning in the late 1990s both because of a supply/demand dynamic and because natural gas prices were long tied to oil prices (a complicated relationship), and oil prices shot up (bottom chart) thanks to worldwide demand and worries about stability in the Middle East. During the Recession, demand decreased for all energy, driving prices down, but while oil recovered -- mostly due to continued demand from Asia, natural gas did not, thanks to a supply glut here at home. Oil is a global commodity, so prices are driven by global demand, while natural gas, a regional commodity, is priced according to U.S. supply and demand alone.

This chart is an elegant debunk of the myth that regulations or local taxes play a major role in slowing or expediting drilling. Prices, not rules, matter. Note how when prices rise (the black line), it’s followed by an increase in rig count (the orange and green lines). When prices drop, rig counts soon follow. In this case, the price-driven drilling frenzy prior to 2009 resulted in so much production (and encouraged the development of technology that opened up the Marcellus shale in the East) that a gas glut resulted. Companies that were focused on natural gas, like Encana or Chesapeake, have suffered and are turning their attention towards oil.

For natural gas-rich, oil-sparse areas this results in a quadruple whammy to the economy. Lower prices decrease royalties and taxes, even if production remains steady. The bulk of the jobs in the industry are created during the drilling phase, and with no operating rigs, those jobs are drying up. And that means fewer people are buying cars, eating at restaurants and shopping for groceries, another blow to jobs and to sales tax revenues for local governments.

Due to a number of factors -- pushed along by the low cost of natural gas -- utilities are slowly replacing coal-fired electricity generation with natural gas. That has helped deal a severe blow to coal mining regions in the East, where thousands of coal miners have lost their jobs. The Powder River Basin in Wyoming, supplier of nearly half of the nation’s coal, has also felt the pressure -- some mines are laying off workers -- but not so severely. PRB coal is cheaper than Appalachian coal per BTU, thanks to massive scale mining, and it’s got a lower sulfur content, so its desirability has not suffered as much. Natural gas burns cleaner than coal, so the switch from coal to gas will likely clean up the air (with the exception of the air around the gas fields). It will also increase demand on natural gas, which will push prices up, which will probably lead to yet another natural gas drilling boom before long.

Whether the boom will ever return in earnest to the San Juan Basin, where the Middle Mesa project would occur, is not clear. Natural gas production there has been dropping off steadily for the last several years, a decline that began when prices were at their highest. It appears that the tens of thousands of producing natural gas wells are finally taking their toll and the reserves in the current formations are running out. The mostly untapped Mancos Shale may provide a grace period, even another boom. Instead of waiting for that, however, the communities of the San Juan Basin might use the current situation as a wake-up call: The energy boom days are numbered, no matter how you look at it.

Jonathan Thompson is a Senior Editor at High Country News.

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