Natural gas production in the US is poised to decline for the first time in half a decade, the government said on Tuesday, as persistently low prices lead to a slowdown in drilling.
The US is the world’s largest gas supplier and is flexing its muscle in international markets through exports of liquefied gas.
But investors concerned about meagre returns have begun to hold back on funding for oil and gas exploration and production companies. The companies have responded by cutting back on capital spending and in turn, tempering their forecasts for future production.
While US “dry gas” production, which excludes hydrocarbon liquids, will rise by 3 per cent to a new record of 94.7bn cubic feet per day this year, the Energy Information Administration said in its short-term energy outlook on Tuesday, it will fall back in 2021.
The agency expects production will be 94.1bn cu ft/d next year, representing the first annual decline since 2016, “as relatively low natural gas prices contribute to a reduction in natural gas-directed drilling”.*
Benchmark US gas for delivery in February settled at $2.187 per million British thermal units on Tuesday, up 0.2 per cent. The price is extremely low for the month of January, which typically features strong winter demand for gas-fired heat. This winter has been warmer than normal across much of the country, with New York last weekend reaching 69 degrees Fahrenheit (21C).
Stocks of US gas in storage sit at 3.1tn cu ft, almost 20 per cent higher than a year ago, the EIA reported last week.
Tim Hess, the EIA’s manager for the energy outlook, said that the decline in gas production would be driven by a drop in drilling in the Appalachian region, where producers have suffered from low prices without oil production to offset their losses.
The Permian Basin of Texas and New Mexico will continue to produce more gas because it comes as a byproduct of drilling in the oil-heavy region, the EIA said.
Cheap gas has hastened the retirement of coal-fired power plants. The EIA forecast that coal’s share of US electricity generation will fall from 24 per cent in 2019 to 21 per cent in 2020 and 2021. A decade ago coal generated almost half of US electricity.
However, the EIA projected that gas’s share of the power supply would hold steady at about 37 per cent over the next two years because of increasing competition from renewables.
Led by rapid expansion of solar and wind capacity, renewable energy will account for 22 per cent of US power generation in 2021, eclipsing the share from nuclear power as five reactors approach scheduled retirements.
*A headline on an earlier version of this story misstated the date of the last slide in output, and has been amended