Natural Gas Boom Fizzles as a U.S. Glut Sinks Profits
The boom has given way to a bust. A glut of cheap natural gas is wreaking havoc on the energy industry, and companies are shutting down drilling rigs, filing for bankruptcy protection and slashing the value of shale fields they had acquired in recent years.
Chevron,
the country’s second-largest oil and gas giant after Exxon, said on Tuesday
that it would write down $10 billion to $11 billion in assets, mostly shale gas
holdings in Appalachia and a planned liquefied natural gas export facility in
Canada. The move was an energy company’s clearest acknowledgment yet that the
industry has been far too optimistic about the prospects for natural gas.
While
cheap natural gas continues to take market share from coal in the electricity
sector, supply of the fuel has far outstripped demand. As a result,
once-booming gas fields in Arkansas, Louisiana and Texas have become quiet
backwaters. The number of gas rigs deployed nationwide has dropped to 132, from
184 last year.
“In
the short term the gas market is oversupplied and is likely to remain so for
the next few years,” said Andy Brogan, oil and gas global sector leader at EY,
the firm formerly known as Ernst & Young. “It’s a cyclical business, and
we’re at the bottom of the cycle.”
Some
analysts said the gas slump could persist for some time because the cost of
wind and solar energy has tumbled in recent years, making those renewable
sources of energy more attractive to power producers. And while gas exports are
climbing, growing production of the fuel in Qatar, Russia and Australia
threatens to drive down international prices over the next few years.
Nowhere
are the declining fortunes of natural gas more in evidence than in Appalachia,
where the Marcellus field centered in central and western Pennsylvania was once
viewed as the most promising in North America. With gas prices slashed nearly
in half from a year ago, the number of drilling rigs operating in Pennsylvania
has dropped to 24, from 47, over the last 12 months. EQT, one of the premier
producers in the Marcellus, recently cut nearly a quarter of its work force,
eliminating 196 positions.
That
is a far cry from the picture Chevron painted when it acquired Atlas Energy
almost exactly 10 years ago for $3.2 billion, while assuming $1.1 billion in
debt, cementing its foothold in southwestern Pennsylvania. At the time, George
L. Kirkland, then Chevron’s vice chairman, predicted that the “strong growth
potential of the asset base and its proximity to premier natural gas markets
make this targeted acquisition a compelling investment.”
Other
energy companies have also acknowledged losses, though not to the same extent.
Exxon Mobil wrote down the value of its American natural gas assets by $2.5
billion in recent years after buying the natural gas producer XTO Energy for
more than $30 billion in 2010.
Gas
producers have struggled in part because New York and other Northeastern states
have made it harder to build pipelines to transport the fuel. But analysts
point to a far bigger problem: The industry is just producing too much gas. In
some oil fields where gas bubbles to the surface with crude, it has become
cheaper for producers to burn the gas than gather it and send it to market.
“Natural
gas is in the tank,” said Patrick Montalban, president of Montalban Oil &
Gas Operations. “We’re looking at a project right now of over 200 wells in
Montana that are for sale, but they are uneconomic. Not only are the wells
uneconomic, the gathering of the gas is uneconomic.”
American
natural gas inventories are about 19 percent higher than a year ago, according
to the Energy Department. The government estimates that the average spot price
for natural gas will be $2.45 per million British thermal units in 2020, about
14 cents below this year’s average. At its peak in 2008, the benchmark price
topped $10 per million British thermal units.
Exports
of liquefied natural gas are rising sharply, but future profits may be meager.
S&P Global Platts warned this week that European gas prices could slide
next year, reducing how much money United States exporters can earn.
Moody’s
Investor Service predicted that several gas exploration and production
companies active in the Marcellus will face heightened financial risks over the
next three years because of the debt they have accumulated. Between 2021 and
2023, companies such as Antero Resources, CNX Resources, EQT and Gulfport
Energy will need to refinance between $3.5 billion and $4 billion in debt. All
told, the producers have to repay lenders more than $12 billion during that
period.
“If
low natural gas prices persist beyond 2020,” the Moody’s report said,
“companies may need to reduce debt to maintain compliance with financial
covenants or amend covenant levels.”
Many
smaller companies have sought bankruptcy protection or indicated that they
could go out of business. Shares of Chesapeake Energy, the Oklahoma-based
champion of shale gas drilling, traded at more than $60 in 2008. Now they sell
for less than a dollar. Chesapeake warned in a recent securities filing that if
prices remained low and it was unable to comply with the conditions of its
debt, “there is substantial doubt about our ability to continue as a going
concern.”
Such
pessimism is widespread.
“We
expect the trend of write-downs to continue as price outlooks are adjusted
down,” said Tom Ellacott, senior vice president at Wood Mackenzie, a research
firm.
Of
course, low natural gas prices have been a boon to users of the fuel,
especially electricity utilities, which are increasingly replacing coal-fired
plants with ones that use gas. Gas is expected to have provided about 37
percent of electricity produced in the United States this year, up from 34
percent in 2018, according to the Energy Department. But renewables are
climbing even faster.
In
a recent report, Morgan Stanley estimated that demand for natural gas would
grow for a few years but fall 13 percent between 2020 and 2030 as utilities
increasingly switch to wind and solar power. Future regulations or a carbon tax
put in place by lawmakers worried about climate change could accelerate the
transition to renewables.
Exports
offer perhaps the greatest growth potential for American natural gas. But even
as companies build more liquefied natural gas export terminals across the Gulf
Coast, competition from Russia and Qatar is intensifying and analysts fear
there could soon be a global glut of gas.
“There is significant uncertainty as to the scale and durability of demand for imported L.N.G. in developing markets around the world,” the International Energy Agency said in a recent report. Considering the high cost of processing and transporting liquefied natural gas, the report added, “competition from other fuels and technologies, whether in the form of coal or renewables, loom large.”