With natural gas prices near record lows, experts posit whether fracking has prompted an oversupply

Tuesday, 31 January 2012 02:43

January 31, 2012

Hydraulic fracturing, more commonly known as fracking, has helped drive U.S. natural gas production, but some scientists question whether it is producing too much of the hydrocarbon.

Fracking has become increasingly common throughout the U.S. over the past few years. Engineers developed the natural gas extraction method only within the past decade, allowing companies to tap natural gas stores contained in shale formations thousands of feet beneath the ground's surface.

The issue has become politically charged – particularly over the past year – but it is unquestionable that fracking has benefited the U.S. energy sector. The U.S. is now the globe's biggest producer of natural gas, thanks largely to its booming fracking sector, and prices of the hydrocarbon have plummeted.

Natural gas prices have dropped so precipitously, in fact, that Chesapeake Energy, the largest producer in the U.S., announced recently it would scale back production. The company's move is aimed at reducing supplies and raising prices, and it has prompted a debate within the scientific and public policy communities over whether fracking is generating an overabundance of natural gas.

Natural gas prices have plummeted by nearly 50 percent over the past year, as fracking has helped fuel U.S. supplies. The Wall Street Journal reports that Chesapeake's decision to curtail natural gas drilling by nearly 50 percent could help raise prices. However, economists and energy experts assert that there is such an oversupply of the hydrocarbon that prices could remain low for years.

While fracking was once inefficient, the natural gas extraction technique has become so effective – thanks in no small part to Chesapeake's pioneering work – that it essentially prompted a natural gas run. Companies set up fracking wells in states such as Pennsylvania and North Dakota, tapping into vast underground stores of the fuel source.

However, with gas prices now at a 10-year low, the oil and gas engineering sector is mulling whether fracking has perhaps been too successful. Chesapeake Energy vice president Michael Kehs said that fracking became so widespread so rapidly that it was impossible for companies to ascertain whether demand would outpace supplies.

"The boom has only occurred over the past few years, and the market at first wasn't sure that it was real," Kehs said. Now, on the other hand, "it is so real that's it's actually depressing prices, and the view is that the price will remain low for a number of years going forward."

Oklahoma-based Chesapeake is the first large-scale producer of natural gas to announce plans to curb production, and it could be precedent setting, given the company's massive scope. NPR reports that Chesapeake is moving roughly 50 percent of the drilling rigs it uses for dry gas wells into those that produce both wet and dry gas. Still, America's Natural Gas Alliance economist Sara Banaszak noted that while companies could scale back gas production, it is unlikely they would abandon shale gas drilling.

"Companies that are here to produce natural gas are here for the long term," she said. "You know, there are micro-adjustments in the path along the way, but I think they've made their investments and I think they're going to pursue that path. One thing that is good about a lot of the unconventional production is the ability to sort of scale it up and down with changes in demand and supply."

Some analysts contend that an atypically warm winter in the U.S. Northeast and Midwest has also helped depress gas prices. Still, analysts from the federal Energy Information Administration project low prices could remain for years. If they do, demand for the hydrocarbon would theoretically rise, as more consumers switch oil-based systems to benefit from low prices.

On the New York Mercantile Exchange on Monday afternoon, natural gas prices for March 2012 delivery were down about 1.5 percent to trade at $2.71 per million BTUs.