Oil & Gas News

Rising Gas Prices: Opportunity for Industry, Pain for Consumers

Gas, Flare

By: Judith Kohler – The Denver Post – The recovering economy is driving up natural gas prices, which could boost energy companies’ bottom lines but hit consumers in the wallet.

Wholesale prices have more than doubled from earlier this year. Natural gas was nearly $6 per million British thermal units Thursday, up from $2.66 in April.

In Europe and Asia, the prices have soared to more than $20 million per BTU. Analysts chalk up the surges to a number of factors: pent-up demand from earlier in the coronavirus pandemic; a move away from coal to natural gas; and slumping supplies beause of less drilling.

In the United States, a net exporter of natural gas, the prices could spur more drilling. Colorado, the country’s No. 6 oil producer and No. 7 natural gas producer, could see a rebound in production.

On the flip side, households and businesses could see a jump in heating and electric bills. Xcel Energy-Colorado, the state’s largest electric utility, is seeking regulators’ approval for a rate increase, citing high prices and low supplies.

“I do not think we’ve seen the highest prices yet,” said Chase Walker, the Denver-based vice president of business development for Embark Consulting. “I do think we’ll see that hit our bottom line for sure, as individuals, as cities, states and governments.”

As the weather is cooling down and winter nears, natural gas supplies are lower than normal. Dean Foreman, chief economist for the American Petroleum Institute, said the pace of additions to underground storage areas is 10% to 15% below the five-year average.

“It’s unprecedented to be in this territory right now at a time where if we have a cold winter, we have concerns and, I think, a lot of explaining to do to consumers about why we don’t have more supply when we have ample resources here at home,” Foreman said.

A big part of the explanation has to do with the sudden, drastic drop in demand for oil at the start of the pandemic that continued as transportation and businesses slowed or shut down around the globe. Big supplies of oil and not enough buyers sent oil prices below zero in April 2020.

Even as activity has rebounded, oil and gas drilling hasn’t returned to pre-pandemic levels. A major reason is that companies have responded to demands that companies return more money to investors and shareholders rather than focus on expansion, said Amber McCullagh, director of midstream research for Enverus.

“We haven’t seen drilling activity return nearly as quickly as it has in the past,” McCullagh said, “so essentially, you have gas demand that’s in excess of gas production today and has been basically all year. Some mild winter weather kind of obscured that for a little while.”

McCullagh and others are watching to see if the rising prices will prompt companies to start drilling more in western Colorado’s Piceance Basin, which is rich in natural gas but has been relatively quiet with the shift in focus to oil the last few years.

McCullagh said the high prices and low supplies in other countries could revive proposals for facilities to liquify natural gas to ship overseas.

Jeremy Nichols, climate and energy program director for the environmental group WildEarth Guardians, said he’s concerned about “a knee-jerk reaction” that will result in more drilling, especially on public lands. He said natural gas is part of a global market.

“More drilling will do absolutely nothing to affect gas prices, but it will saddle our public lands and climate with more pollution, more dirty energy, and more unhealthy reliance on fossil fuels,” Nichols said in an email.

The use of natural gas has increased more quickly than oil in part because it’s used for heating and generation of electricity, which people working from home need, McCullagh said. On the other hand, rates of airplane travel and driving, fueled by oil, haven’t returned to pre-pandemic levels, she said.

Still, oil prices were climbing toward $80 a barrel Thursday, near their highest level in three years, according to The Wall Street Journal.

But drilling hasn’t kept pace with the rise in prices. That affects natural gas production because much of the drilling in the country’s major oil fields, including Colorado’s Denver-Julesburg Basin on the northern Front Range, produces natural gas along with the oil.

McCullagh said there are 10 to 11 drilling rigs in the D-J Basin, down from roughly 20 before the pandemic.

“ We have capital discipline back in the industry, which is definitely a good thing,” Walker said. “Will the drilling increase? I think it has to. Typical economics. Where there is demand you have to have supply to reach that.”

But Foreman said it won’t be easy to quickly rebuild oil and gas production. Like other industries, the oil and gas sector is wrestling with filling jobs after layoffs.

“Companies took on extra debt to make it through the downturn last year and have to right their balance sheet to grow,” Foreman said. “And then the icing on the cake is you have energy policy really piling on and adding some insult to injury.”

Foreman referred to the Biden administration’s pause on oil and gas leasing on public lands and the cancellation of the permit for the Keystone XL crude oil pipeline, which would have shipped crude from the oil sand fields in western Canada to Nebraska.

In Colorado, Foreman said Senate Bill 181, which revamped the state’s oil and gas regulations, has increased production costs and cooled investors’ interest in the state.

The new state rules took effect Jan. 15. The Colorado Oil and Gas Conservation Commission approved 471 drilling permits through Sept. 22 under the previous regulations. There is still a backlog of permits that could be processed under the previous rules.

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