A little known crisis is approaching in the world of natural gas, one that threatens the most successful part of the largely imaginary New American Bonanza (NAB) in oil and gas brought on by hydraulic fracking. The gas frackers did manage to increase domestic supplies, so much so that two things happened: every electric generator that could switch from coal to gas, did so; while the glut drove the price down so far that the gas producers started losing money. Their output, which had grown by seven percent in 2011 and five percent in 2012, managed to inch up one percentage point last year. Now the entire industry has an iceberg just off the starboard bow.
There isn’t enough natural gas in the system to get us through a winter. The marketers have been too good at selling gas furnaces — they now heat half of our homes. So for years now the industry has during the milder months stockpiled four trillion cubic feet of gas in underground caverns. And in a typical winter, the industry draws down two trillion square feet to meet demand. Last winter, it took over three trillion. If that gas is not replaced in the reserves, and the winter is anywhere near as cold as the last one, people could be facing not just high prices, but insufficient supplies.
The bad news is that efforts to refill the caverns are running well behind the required pace, in part because natural gas is used for refrigeration and air conditioning, too, and demand is running very high. The good news is that gas prices are rising (no, wait, isn’t that the bad news?) and that is causing power companies to start switching back to coal (you call that good news?), thus easing demand.
One unanswered question is whether the fracking companies, even given the gift of rising prices, will be able to respond with increased production. The hideous depletion rates of fracking wells means they have to be replaced at least every four years, more often than that if one wants to maintain or increase production volumes. The strains of trying to maintain the illusion of the NAB in the face of hard realities has left the players virtually broke and heavily in debt. Chesapeake Energy, the biggest player in the Marcellus Shale of West Virginia, Pennsylvania and New York, has been shedding wells and leases like a molting chicken sheds feathers. Last year, only 23 percent of its revenue came from selling gas. In desperation, it has been finding ways to cut payments to the owners of land it has already drilled, in some cases by 90 percent.
More and more this industry resembles the legendary retailer whose business plan was to sell shoes for a dollar a pair less than he paid for them, making up for the loss with “volume.” Then there’s the shortage of shoes. It was once claimed that the Marcellus (the only gas-fracking play in the country that has not yet peaked) contains 410 trillion cubic feet of recoverable gas. The emerging consensus is more like 50 trillion. To quote the governor of Texas: “Whoops.”
Now if this sick puppy of an industry fails to meet demand this winter, people will suffer and die, and the loss of faith will be complete. If the winter is mild and nothing bad happens, which seems likely in a year of El Nino, will we all continue to sing Happy and skip toward the edge of the cliff?
That would be the bad news.