A quiet decline: As the natural gas market falters, Wyoming has a lot to lose

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This summer, as coal companies fell into bankruptcy and mines idled, a quieter crisis took place in another part of Wyoming’s energy landscape. This one received fewer headlines and less attention from the state’s politicians. But its impact could, at least in the near-future, be nearly as devastating as coal’s collapse.

A surge in natural gas production nationwide coupled with paltry prices have put energy operators in Wyoming to the ultimate test in recent months. Amid greater competition from outside the state’s borders, natural gas production here fell by 11 percent compared with last year. Long-term forecasts cast an ominous light on the prolific resource that has fueled the state’s economy for decades.

“I think people overlook this because people get so focused on the coal bankruptcies lately,” said Jim Robinson, principal economist at the Wyoming Economic Analysis Division. Since October, over half a dozen coal firms have declared bankruptcy and Wyoming coal production has plummeted 9 percent this year.

“Natural gas is down by 11.2 percent, so even more of a drop (than coal),” Robinson noted.

According to a recent state report, during the first half of 2019, natural gas production dropped by 105 billion cubic feet compared to the same period last year. That means, natural gas has declined by 37 percent in Wyoming since 2009, a decline on par with coal, based on state forecasts.

All the while, natural gas’ dirt-cheap prices have barely budged.

This summer saw the cheapest natural gas prices in decades. Henry Hub natural gas spot prices have hovered between $2 and $2.50 per million British thermal units for months on end.

“We’re definitely entering troubling times,” said Paul Ulrich, vice president of government and regulatory affairs at Jonah Energy, a leading natural gas producer operating in Wyoming’s Green River Basin. The region produces 59 percent of the state’s natural gas. “In such a depressed price environment, with such an oversupply of natural gas, we’re seeing our traditional market share shrink and our production decline in Wyoming.”

Operators and the state have a lot to lose in the glutted natural gas market, according to interviews with several analysts and operators.

“We will see a significant decline in overall production across the state and an extremely depressed natural gas market in the next two years unless we, collectively as Wyoming, can provide some solutions,” Ulrich said. “If these trends continue, we could be in very, very serious fiscal trouble in Wyoming.”

Natural gas has long been a bedrock of Wyoming’s economy. Last year, oil and natural gas production brought in over $1.3 billion in tax contributions to the state. The industry employed over 18,000 workers that same year. As the eighth-largest producer of natural gas in the country, Wyoming has been a key player nationally.

But its competitive edge may be eroding.

Shale revolution

A decade ago, natural gas was a star on Wyoming’s energy stage. The Henry Hub, a U.S. benchmark for natural gas, spiked to nearly $13 in response to the 2008 economic collapse. A similar surge in the price tag for natural gas occurred in 2005 when Hurricane Katrina wiped out a major source of gas on the Gulf Coast.

“Those were the gravy train days for natural gas,” explained Clark Williams-Derry, an analyst at the Institute for Energy Economics and Financial Analysis, an environmental think tank. “Hurricane Katrina, in particular, seemed to be the one event that really unlocked the fracking revolution.”

With the boom in hydraulic fracturing, operators suddenly had access to unprecedented volumes of natural gas. Fracking wasn’t necessarily a new process, though operators had never employed the method at such a colossal scale.

But the influx of investment in drilling projects thanks to fracking has not always had the best returns for natural gas. That’s because most companies are hungrier for oil, which can produce more cash than gas. Natural gas is often considered a byproduct of oil drilling, or worse, a nuisance.

Add to that a lack of pipeline infrastructure and operators will turn to flaring to burn off excess gas extracted alongside oil, the king commodity.

Over the course of the last decade, crude production in the country has increased 120 percent as investors poured capital into exploration and drilling projects. Natural gas production climbed 52 percent during the same time period.

Put in the most simple terms, there’s still too much of it. The market is over-saturated with natural gas. Demand isn’t keeping pace. As a result, gas prices have cratered and operators have had to drill on ever-leaner budgets.

Wyoming’s conventional gas rig count, often an indicator of investor interest in drilling, has also stayed relatively steady this year, oscillating between 10 to 11 rigs.

From the natural gas play in Texas’ Permian Basin to the Marcellus and Utica shales in the Northeast, other hot spots for natural gas drilling litter the country, making competition tight. Wyoming’s neighboring states also contribute a sizable chunk of natural gas to the market.

“It’s not like natural gas is unique to Wyoming,” Robinson, the economist, pointed out.

Higher tax burdens, steep supply costs and delays in federal land permitting also deter companies from putting down roots in Wyoming, according to Ulrich, of Jonah Energy. A weak natural gas market combined with these challenges have had a chilling effect on investment in the industry.

“That makes Wyoming not as competitive as we should be in the national market,” he said. “As a state, if we continue to lose rigs and continue to be uncompetitive in the natural gas markets, we lose the capital investments, we lose the tax revenue and we lose those jobs.”

Added to that stress are looming debt deadlines.

Across North America, oil and gas companies will owe a whopping $93 billion in debt by 2023, according to Moody’s Investors Service 2018 data. Several oil and gas firms declared bankruptcy and refinanced during the last bust in 2015 and 2016.

But given sustained low commodity prices, many firms have been unable to move back into the black. The impressive influx of crude and gas to the market has exacerbated the problem, several analysts said.

That means some companies may not be in a state to successfully repay their debts and could lose the support of banks. According to reporting by Bloomberg, investors could be hesitant to bite again this time around if companies founder.

Not everyone loses

There are winners in Wyoming’s current natural gas climate.

Mesa Solutions Natural Gas LLC, a power solutions provider, is taking full advantage of the glut of natural gas. The Wyoming-based company helps oil and gas operators make use of the abundant, inexpensive resource. Instead of using costly diesel to power remote oil and gas fields, Mesa Solutions engineered natural gas generators to fuel everything from pumping units to large micro-grids.

“Sometimes it’s just not financially feasible to even process natural gas or send it to the pipeline (because of low prices),” explained Trey Lawson, the company’s senior business development manager. “So we provide operators with reliable and responsible power to their operations, but we also offer a solution to flared or vented gas.”

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Funneling natural gas all the way to a customer often earns pennies on the dollar for an operator. So, many have to turn to flaring, a process of burning off excess natural gas.

A public push for a less carbon-intensive economy has started to place pressure on natural gas markets, too. Politicians and investors are showing signs of shying away from supporting oil and gas operations, especially as many firms are already saddled with persisting negative cash flows and debt.

A majority of gas now flows to the electricity market. But the accelerated development of renewable energy could also pose a challenge to natural gas down the road.

Timm Smith, CEO and president of the McMurry Group and NERD Natural Gas LLC, remains optimistic for Wyoming’s natural gas sector. The investment firm has an eye toward expanding its backing of oil and gas projects in Wyoming.

“Our last discussion has been to actually increase energy investments, it’s been the staple of our company and really the start of our opportunity to make investments back into the state,” Smith said. “Luckily, the family has supported it even with the challenges that are out there.”

Still, most individuals with a hand in Wyoming’s natural gas sector don’t foresee the resource bouncing back any time soon.

“I don’t see a huge rebound in natural gas prices near-term and I think oil will stay very volatile,” Smith added. Yet, as a family-oriented, Wyoming-based firm, Smith’s team can be more nimble in responding to market changes.

Another segment of Wyoming’s population that reaps rewards from the current gas environment is consumers. The slump in natural gas prices have delivered cheaper utility bills to ratepayers. That allows consumers to save or spend more, and potentially boost the economy, economists said.

Seasonal factors also have a role in short-term price adjustments for natural gas.

Gas prices have started to rally as bitingly cold winters set in across the country. In the near-term, Wyomingites will likely see natural prices inch up a bit as winter sets in.

“Certainly with a little volatility we move into the colder part of winter,” noted Robinson, the Wyoming economist. “That’s normal. You start to see a drawdown in the supplies of natural gas around the country.”

But the change will likely be minimal and temporary.

“Absent a catastrophe somewhere, natural gas prices don’t really change very much,” Robinson said.

Even with natural gas’ current struggles, several energy experts consider the longer-term pressures ailing the natural gas sector as separate from those faced by coal. The environmental and technological strains driving down the coal sector haven’t afflicted natural gas with the same force — at least not yet.

Recent Wyoming revenue forecasts predict weak, yet stable, natural gas production and prices for the coming year. The commodity is likely here to stay for the foreseeable future.

“It’s important to remember that into the future, gas is still going to play an important role in the finances and development of the state,” said Ryan McConnaughey, the spokesman for the Petroleum Association of Wyoming. “Beyond that, natural gas is a major employer in the state. It makes a lot of contributions to the state that we don’t want to have lost.”

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