During the past decade, the processes of hydraulic fracturing and horizontal drilling have liberated enormous amounts of natural gas from shale - a rock unit that rarely yielded gas to the drill in the past. Now, all of that new natural gas capacity is flowing into the market and changing the dynamics of natural gas pricing. In some areas such as the Marcellus Shale region, so much new natural gas is now available that existing pipelines are inadequate to take it away from the well sites.
All of this new natural gas capacity has produced a current price of natural gas that is much lower than levels of just a decade ago. That is great news for consumers, but for the energy companies, the lower price has damaged their anticipated profits.
How Are Natural Gas Prices Determined?
The price that a buyer pays for natural gas depends upon many factors. Three of the more important factors are: 1) the quantity of gas being purchased, 2) the amount of processing that has been done to prepare the gas for the buyer, and, 3) the amount of transportation required to deliver the gas to the buyer.
Who Pays the Lowest Price?
Lowest gas prices are paid by companies who purchase the gas as it flows from a well. This is known as the "wellhead price." These buyers receive a low price because they purchase very large amounts of gas that have not been processed or transported.
Who Pays the Highest Price?
Highest prices are generally paid by homeowners. They buy very small quantities of processed gas delivered directly to their homes through an extensive distribution system. They must pay for the processing and delivery. They must also pay the costs of metering, billing, distribution system maintenance and customer service. They pay the highest price for gas because so many services are required. They pay what is known as the "residential price."
The Future of Natural Gas Prices
The price of natural gas in the future will depend upon factors of supply and demand. Supplies of natural gas are growing. New drilling technology makes it possible to extract quantities of natural gas from tight shale formations that were unproductive in the past. These rock units are present in many parts of the world and are geographically extensive. They have significantly added to the natural gas resource.
Other developments also increase the future supply of natural gas. Compressing natural gas into a liquid (LNG - liquefied natural gas) enables countries without pipeline access to markets to produce gas and ship it to distant locations. Just a decade ago the natural gas in some areas was considered to be a waste product and burned at the well site. LNG makes it a marketable commodity.
Developments related to coal-bed methane, landfill gas, and deepwater drilling all bring new sources of natural gas to potential markets. On the demand side, there are several ways that natural gas consumption could rise rapidly. Current low prices motivate anyone who can use natural gas as a replacement fuel. Some electric utilities can easily switch to natural gas.
Natural gas use can also be favorable for the environment. Burning gas produces significantly fewer emissions than burning coal, oil, gasoline or diesel fuel. Legislation that limits emissions or incentivizes emission reduction could result in a dramatic increase in natural gas consumption in the electric power industry and other sectors.
Natural gas also has opportunities for tremendous expansion as a vehicle fuel. It is cleaner-burning than gasoline, it can be more cost-effective in many situations, and it is produced locally instead of imported.
In an effort to develop new natural gas resources, many new pipelines are being built. These will deliver natural gas to new markets and increase its use.
Highest prices are generally paid by homeowners. They buy very small quantities of processed gas delivered directly to their homes through an extensive distribution system. They must pay for the processing and delivery. They must also pay the costs of metering, billing, distribution system maintenance and customer service. They pay the highest price for gas because so many services are required. They pay what is known as the "residential price."
The Future of Natural Gas Prices
The price of natural gas in the future will depend upon factors of supply and demand. Supplies of natural gas are growing. New drilling technology makes it possible to extract quantities of natural gas from tight shale formations that were unproductive in the past. These rock units are present in many parts of the world and are geographically extensive. They have significantly added to the natural gas resource.
Other developments also increase the future supply of natural gas. Compressing natural gas into a liquid (LNG - liquefied natural gas) enables countries without pipeline access to markets to produce gas and ship it to distant locations. Just a decade ago the natural gas in some areas was considered to be a waste product and burned at the well site. LNG makes it a marketable commodity.
Developments related to coal-bed methane, landfill gas, and deepwater drilling all bring new sources of natural gas to potential markets. On the demand side, there are several ways that natural gas consumption could rise rapidly. Current low prices motivate anyone who can use natural gas as a replacement fuel. Some electric utilities can easily switch to natural gas.
Natural gas use can also be favorable for the environment. Burning gas produces significantly fewer emissions than burning coal, oil, gasoline or diesel fuel. Legislation that limits emissions or incentivizes emission reduction could result in a dramatic increase in natural gas consumption in the electric power industry and other sectors.
Natural gas also has opportunities for tremendous expansion as a vehicle fuel. It is cleaner-burning than gasoline, it can be more cost-effective in many situations, and it is produced locally instead of imported.
In an effort to develop new natural gas resources, many new pipelines are being built. These will deliver natural gas to new markets and increase its use.
