Six months ago, it seemed as though the E&P companies would finally have a chance to make some serious money, or at least more than they have to spend to get natural gas out of the ground. The rise in gas demand thanks to the polar freeze gave the industry some hope that US prices would start to rise to the $5/million metric British thermal units level.

But no. Oil prices have been weak both in global markets and in the US, but not weak enough to induce deep cuts in the E&P oil-directed drilling budgets. The “associated” gas produced by those shale oil rigs has flooded the US domestic market this year, more than offsetting declines in conventional gas production and older shale gasfields. So the E&P companies could not stop themselves from producing gas at less than the US marginal cost of production.

The E&P companies’ revenues were further squeezed because much of the new natural gas and liquids they have developed was at the wrong end of the country’s existing pipeline system. For the past seven decades, US pipelines have mostly taken oil and gas from the southwest and transported it to the northeast.

The unexpectedly large and rapidly developed Marcellus and Utica
fields disrupted the economics of
this expensively developed system.

Because new pipelines need extensive planning permissions, long term financing and scarce skilled labour, the E&P companies have had insufficient capacity available for their product. There is so much competition for access that gas and liquids can only be sold at steep discounts, or “basis differentials”, to the generally quoted Henry Hub pipeline price, when they can be sold at all.

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