Low Natural Gas Prices Put Upstream Development on the Back Burner

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Researched by Industrial Info Resources (Sugar Land, Texas)--Anyone watching the news recently has seen natural gas prices fall drastically from where they were just a couple of years ago. Last week, natural gas prices reached as low as roughly $2.26 per million British thermal units (MMBtu). This low price comes from an excess of supply and a dearth of demand in the U.S. market. As a result, many of the plants and projects in the natural gas sector, especially those upstream at or near the wellhead, are being affected.

In a market where inventories are still nearly full after the winter season, more drilling to increase supply would only cause more decay in the price of natural gas, perpetuating the cycle. As a result, some gas producers are reconsidering their planned drilling efforts. One producer, Bill Barrett Corporation (NYSE:BBG) (Denver, Colorado), has put drilling expansions on indefinite hold at its West Tavaputs, Utah, natural gas field that were previously planned for 2013 through 2015, pending a rise in natural gas prices. It is thought that prices will have to go up to at least $4 in order to bring these expansion plans back to life.

The goal in cutting drilling is to cut inventory costs associated with putting more natural gas into an already well-supplied system. Drilling cuts, however, are not the only way that companies are cutting costs. Anadarko Petroleum Corporation (NYSE:APC) (The Woodlands, Texas) maintains a substantial footprint in gathering and processing in the Rockies, specifically Wyoming and Utah. However, with falling natural gas prices and comparatively high development costs in the mountainous environment, Anadarko has managed to cut costs by repurposing existing infrastructure. Specifically, the Red Desert processing plant in Wamsutter, Wyoming, has had its processing units temporarily shut down while its compressors are still in use to ferry natural gas to the newer, more cost-efficient Patrick Draw processing plant in Rock Springs, Wyoming.

By contrast, drilling and production in other markets, such as Texas, are less affected by the lack of demand. Factors such as terrain and lower permitting costs keep the break-even price for Texas-based drilling operations comparatively lower than their Rocky Mountain counterparts. Market access also plays a part in the difference in effect between the two geographic regions. Where Texas has access to multiple markets throughout the United States, the market in the Rockies is comparatively isolated, making it more difficult to reach potential customers.

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Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.