U.S. natural gas production has experienced a boom over the last decade due to new drilling and extraction techniques allowing gas companies to extract minerals more efficiently. This has resulted in a glut in the market for natural gas such that the industry anticipates storage capacity will be completely exhausted in the near future. Just how significant is the increase in production, and how has the massive surplus come to be? The growth in U.S. natural gas production averaged 63 billion cubic feet per day in 2012, representing a 24 percent increase from 2006. However, in this same period, production outpaced consumption two-fold.

As in any market where a commodity is in such abundance that it outpaces demand, there will be pronounced pressure to lower prices. Natural gas has experienced this same phenomenon. Historically, natural gas has been 10 times cheaper than crude oil. Presently, natural gas is approximately 35 times cheaper than crude oil. Natural gas prices reached their lowest level in a decade during early 2012. Although gas prices have increased over the past year, prices still remain low, as demand has yet to catch up with the vast supplies on hand. Analysts indicate that prices are likely to remain comparatively low for the foreseeable future, which is causing a shift in thinking about drilling and extraction operations.

The positive? This glut has benefited businesses and homeowners that use natural gas, as well as those landowners who have been able to benefit from the drilling boom. However, with natural gas prices having hit a 10-year low, gas companies have fallen victim to their success. Some of the largest natural gas producers, such as Chesapeake Energy, ConocoPhillips, Royal Dutch Shell, BHB Billiton, and Encana, have indicated that they will scale down production as a cost-cutting measure in response to the down market. It is anticipated that the efforts to scale down because of the current market conditions will involve slowing production from existing wells or even stopping production at some wells. These companies are also redirecting their spending away from the development of new drilling operations and are implementing cost-cutting measures on existing projects, as many projects initiated during the 2009-2012 gas boom period are now valued below their purchase price. A report earlier this year by Bloomberg indicates that acquisitions of North American energy assets dropped to the lowest level since 2004 during the first half of 2013. These conditions, according to some analysts, will persist.

In the face of a flush market, low prices, and scaled-back growth plans. This problem is made worse by the fact that companies who acquired substantial debt on shale acreage are discovering that drilling programs on this property are not lucrative enough to justify continuing at the status quo. According to a New York Times article published October 21, 2012 the top 50 oil and gas companies raised and spent an annual average of $126 billion over the last six years on drilling, land acquisition and other capital costs. With natural gas prices effectively bottoming out in 2012, gas companies are left scrambling to reconcile these investments which have decreased significantly in value. So, how where does a cash strapped exploration company get some cash?

 

In part 2 we will look at lease/royalty litigation trends...

 

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All of the leases that I have seen have arbitration as a mandatory remedy for disputes. I wonder hgow bogus that is?

This is very common throughout history in the oil biz. If you take any college Intro to Econ course, they will discuss the oil industry's history of boom and bust. When Spindletop was drilled, it drove prices very low and drove many companies out of business. But it also coincided with Ford's intro of the Model T and the combination of cheap cars and cheap fuel kick started the automobile age.

Every time there is a major new field or a dramatic change in extraction technology, there is a rush that results in cheap oil and some companies going out of business.  Its a way of weeding out the less efficient and the foolish risk takers.  And sometimes just bad luck by the ones left out.

The low energy costs will help some businesses grow rapidly.  Others will be hurt. Thats the dynamics of capitalism.

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