Natural gas falls below $2

US has more gas than it knows what to do with.

An opponent of fracking attends regulatory hearings in New York State. (Getty)
An opponent of fracking attends regulatory hearings in New York State. (Getty)

The benchmark price of natural gas has fallen below $2 per million British thermal units (BTUs) for the first time in just over a decade, as new technologies and practices in the United States overwhelm demand.

The standard used is the price of gas at the Henry Hub in Louisiana, a key connection between 13 different pipelines, and it is generally representative of the wholesale price across North America. Owing to the localised boom in production, however, the low prices have not been matched in the rest of the world.

This boom has occurred because of a sharp rise in the use of hydraulic fracturing, or "fracking", and horizontal drilling (which is what it sounds like it is) to retreive gas from previously untappable shale rocks. These technologies are controversial due to the damage they do to the environment above and beyond what is normal for resource extraction.

Fracking involves pumping highly pressurised fluid into wells to force the creation of fractures in the rock, allowing the gas to escape to within reach of the drills. The concern is that the fluids used, although 98 per cent water, contain a number of known toxins, carcinogens and radioactive tracers, all of which can potentially seep into and contaminate groundwater. The practice of creating the fractures themselves has also been linked to small earth tremors in the locality of the well.

Despite this, fracking has taken off in the US, with overall gas production rising from 59 billion cubic feet per day in 2010 to 69 billion cubic feet per day in 2012. This increase, added to an unusually warm winter which reduced demand, has led to the supply boom which has so surpressed prices.

The surplus is so great that producers are struggling to store all the extra gas they have. The Financial Times reports:

Gas stored in underground caverns is nearly 56 per cent higher than a year ago, suggesting supplies may test demonstrated capacity of 4.1tn cubic feet before heating demand resumes next winter.

One source of fresh short-term demand may come from power plants switching from coal to gas. However, “right now we don’t believe power can generate enough demand to limit storage from approaching capacity in the fall”, said Logan Reese, manager of quantitative analysis at Bentek Energy.

The problem is that natural gas is often a side-benefit of production aimed at extracting other petrochemicals, so that even as demand slumps and supply soars, it is still pumped up. If we can store it all long enough to burn it, that's not a huge problem, but it does mean that the price is likely to stay low for quite some time.