PITTSBURGH: As natural gas prices continue to drop, the nationwide boom in drilling is slowing. Drillers don’t make money if prices go too low — and drilling wells isn’t cheap.
“It is safe to say that there will be fewer natural gas wells drilled in 2012,” said Kathryn Klaber, president of the Marcellus Shale Coalition, an industry group based in Pennsylvania.
In recent weeks, several companies have announced plans to cut gas production around the nation, but experts say the low prices are also opening up markets.
When the shale drilling boom was starting in 2008 the average price for a unit of gas was about $8. Two years ago, it was down to $5.50, and now it’s dropped to about $2.50. Part of the reason is that the shale gas formations became productive more rapidly than expected, as thousands of wells have been drilled nationwide.
Industry reports note that the national count of active new drilling rigs fell to 775 in early February, down from about 1,500 in 2008.
Yet Klaber said that the low prices create opportunities for more people and industries to use the product. For example, some drilling companies are focusing more on the so-called “wet gas” that sells for a higher price because it can be transformed by refineries into consumer products such as plastics and fertilizer.
Last month, Chesapeake Energy of Oklahoma City said it is reducing the number of new dry gas drilling rigs from 47 to 24 this year. In addition, it immediately cut production by about 500 million cubic feet a day, adding that if low prices persist, it may double the cut, to 1 billion cubic feet a day.
The company said that about 85 percent of its nationwide drilling expenditures this year will be toward the more profitable wet gas.
A spokesman for Chesapeake didn’t respond to a request for comment.
Experts say the companies have ways to cushion the low prices. It’s called hedging, and business people have used such tools for hundreds, if not thousands, of years, said Sara Moeller, a professor of business at the University of Pittsburgh.
“When you put a hedge on, you’re locking in one of your prices, because you’re happy with that price,” said Moeller, who has also worked as a commodities trader.
For example, Houston-based Cabot Oil & Gas Corp. said last month that it received $5.17 per thousand cubic feet of natural gas on some hedged deliveries in the final quarter of 2011. Yet the market price at the time was $3.18 per thousand cubic feet.
Moeller said such deals are possible because large consumers of commodities, such as utility companies, also want to reduce price swings. Locking in prices limits their exposure to sudden jumps.
It’s done by a simple, registered trade on stock exchanges. People essentially buy and sell the hedges, setting varying prices for different points in the future.