As Natural Gas Prices Hit 14-Year High, Shale Awaits

As Natural Gas Prices Hit 14-Year High, Shale Awaits
A generation rig owned by SWN Drilling Services is put to work in a patch of the Fayetteville Shale field, in northern Faulkner County southwest of Damascus in 2014.

Arkansas Public Service Commission Chairman Ted Thomas had heard about the problem from lawmakers, their constituents and regulatory colleagues.

Then the recent natural gas price surge truly hit home.

“Even my wife asked me what’s going on with our natural gas bill,” the utility regulatory chief told state legislators last month, describing a “triple whammy” of brutality in the market.

Natural gas on the Henry Hub market was selling last week at nearly $7 per million British thermal units, its highest price in 14 years, after Russia cut off Poland and Bulgaria to punish their resistance to its invasion of Ukraine.

That price is still about half the peak in 2008, when prices neared $14 per million BTU, but a shock to the system in a post-fracking world.

Hydraulic fracturing — boring down, then horizontally, and using pressurized water and chemicals to pulverize bedrock and free up oil and gas — revolutionized production after being applied to shale formations, including the Fayetteville Shale in Arkansas.

Booming about the time gas prices hit $14, fracking unleashed a torrent of natural gas for more than a decade, glutting the market and sending prices below $2 several times between 2012 and 2020. As reserves grew and prices collapsed, fracking fell off in most U.S. shale plays. Producers stopped drilling in the Fayetteville Shale in 2015-16, and the industry’s workforce was decimated. Likewise, royalty payments to landowners and state severance tax collections collapsed to a fraction of their peak numbers. Arkansas jobs in the logging and mining sector, which includes fracking jobs, have plunged from nearly 12,000 in November 2011 to 5,300 in February 2022, according to the federal statistics.

Thomas’ “triple whammy” started with an extreme cold catastrophe in February 2021, when the Texas grid failed lethally. The crisis meant some utilities spent “four or five times the dollar cost of gas in 10 days than they did for the entire previous calendar year,” Thomas said. “We’ve had five years of low and stable natural gas prices. In fact, some natural gas producers went bankrupt.”

Supply-and-demand effects on natural gas are also warped, because 70% of gas is used from November to March. “Imagine being in the Christmas tree business,” Thomas said. “The price that really matters is in December.”

The third problem, of course, is the war in Ukraine. “Europe is dependent on Russian natural gas,” and despite U.S. efforts to ramp up exports of liquefied natural gas, “it’s just part of what’s driving the price up for American consumers.”

Looking back, Thomas said, fossil fuel defenders may have chosen the wrong carbon to protect as decarbonization became a political force on the left. “Fracking saved consumers billions and billions of dollars,” the PSC chairman continued. “Fracking is what drove coal bankruptcies, because gas and coal compete [as a fuel for generating electricity]. And you never heard that. … We should have defended fracking jobs instead of coal jobs. If we had, customers might be in a better place.”

Sustained prices above $4 per million BTU will eventually stimulate gas drilling, said Hugh Daigle, a drilling expert and associate professor at the University of Texas. Daigle said drilling is already up, but mostly in fracking areas that produce both gas and oil, like the Permian in Texas. Oil prices have been high for months, with gas costs trailing along.

“Fayetteville is a dry gas play, not producing oil,” said Daigle, who quoted studies suggesting that $4 gas is the break-even point in Arkansas’ gas fields. Some fracking companies are hiring, including Calfrac Well Services, which has 10 jobs open in Beebe and Searcy.

But Daigle said those openings might reflect a post-COVID worker shortage, “the kind of weakness in the overall labor market we’ve been seeing. Even if there isn’t a lot of drilling, operators may be hiring for day-to-day operations on wells that are still producing. Throughout the oilfield sector now, they’re hiring and offering crazy signing bonuses, up to $1,000.”

With natural gas at current prices, Daigle said, new production is looking viable. “But it’s not just a matter of getting to that price level, but rather maintaining that price level, that’s going to get those upfront investments flowing.”

Lawrence Bengal, director of the Arkansas Oil & Gas Commission since 2005, told Arkansas Business that no drilling permits have been issued in the Fayetteville Shale this year, and no new fracking is anticipated, though it may be performed on existing wells. “We do not anticipate any activity in the near term,” Bengal said, “and until there are new drilling permits issued no new hydraulic fracturing operations will occur.”