The recovering economy is driving up natural gas prices, which could boost energy companies’ bottom lines but dent consumers in the wallet.
Wholesale prices have more than doubled since the beginning of this year. Natural gas was around $6 per million British thermal units on Thursday, up from $2.66 in April.
In Europe and Asia, prices have exceeded $20 million per BTU. Analysts narrowed the jump to a number of factors: demand slowdown from earlier in the coronavirus pandemic; move from coal to natural gas; and short supply due to less drilling.
In the United States, a net exporter of natural gas, prices could prompt more drilling. Colorado, the nation’s No. 6 oil producer and No. 7 natural gas producer, could see a rebound in production.
On the other hand, homes and businesses can see a jump in heating and electricity bills. Xcel Energy-Colorado, the state’s largest electric utility, is seeking regulators’ approval to increase the rate, citing high prices and short supply.
“I don’t think we’ve seen the highest prices yet,” said Chase Walker, Denver-based vice president of business development for Embark Consulting. “I think we’ll see that it certainly affects our bottom line, as individuals, as cities, states and governments.”
As the weather is getting cooler and winter is approaching, the supply of natural gas is less than usual. Dean Foreman, chief economist at the American Petroleum Institute, said the pace of growth in underground storage areas is 10% to 15% below the five-year average.
“It’s unprecedented at the moment to be in this area, where we worry if we have a cold winter and, I think, to explain to consumers why we don’t have more supplies when we have enough at home. Resources here,” Foreman said.
A large part of the explanation has to do with the sudden, sharp drop in oil demand at the start of the pandemic, which continued as transportation and businesses slowed or closed worldwide. A large supply of oil and ample buyers sent oil prices below zero in April 2020.
Even as activity has resumed, oil and gas drilling has not returned to pre-pandemic levels. A key reason is that companies respond to demands that companies return more money to investors and shareholders rather than focus on expansion, said Amber McCullagh, director of midstream research for Envers.
“We haven’t seen drilling activity return nearly as quickly as it has been in the past,” McCullough said, “so essentially, you have gas demand that exceeds gas production today and basically has been throughout the year.” Some mild winter weather obscured it for a while. “
McCullough and others are looking to see if rising prices will prompt companies to start more drilling in western Colorado’s Pisces Basin, which is rich in natural gas but with a focus on oil over the past few years. is relatively quiet.
McCullough said higher prices and shorter supplies in other countries could revive proposals for facilities to liquefy natural gas to ship overseas.
Jeremy Nichols, climate and energy program director for environmental group WildEarth Guardians, said he is concerned about a “knee-jerk reaction” that would result in more drilling, particularly on public land. He said that natural gas is a part of the global market.
“More drilling will do absolutely nothing to affect gas prices, but it will affect our public lands and climate with more pollution, more dirty energy and a more unhealthy reliance on fossil fuels,” Nichols said in an email.
McCullough said the use of natural gas has grown more rapidly than oil partly because it is used for heating and power generation, which are needed by people working from home. On the other hand, rates of oil-fuelled airplane travel and driving have not returned to pre-pandemic levels, she said.
According to The Wall Street Journal, oil prices were heading towards their highest level in three years on Thursday, near $80 a barrel.
But drilling has not been able to keep pace with the increase in prices. This affects natural gas production because most drilling in the nation’s major oil fields, including Colorado’s Denver-Julesburg Basin on the North Front Range, produces natural gas with oil.
McCullough said there are 10 to 11 drilling rigs in the DJ Basin, down from about 20 before the pandemic.
“We have capital discipline in the industry, which is definitely a good thing,” Walker said. “Will drilling increase? I think will have to do. specific economics. To reach where there is demand, you must have supply.”
But Foreman said quickly restoring oil and gas production will not be easy. Like other industries, the oil and gas sector is also struggling to fill jobs following layoffs.
“Companies took on additional debt last year to recover from the downturn and need to correct their balance sheets to grow,” Foreman said. “And then the icing on the cake is you have energy policy really piling up and adding some humiliation to the injury.”
Foreman referred to the Biden administration’s halting of oil and gas leasing on public land and the cancellation of permits for the Keystone XL crude oil pipeline, which would have shipped crude from oil sands fields in western Canada to Nebraska.
In Colorado, Foreman said Senate Bill 181, which reformed the state’s oil and gas regulations, has increased production costs and piqued investor interest in the state.
The new state rules came into effect from January 15. The Colorado Oil and Gas Conservation Commission approved 471 drilling permits as of September 22 under previous rules. There is still a backlog of permits that can be processed under the previous rules.