Are Natural Gas Prices Below $3 Sustainable?
by Bob Shively, Enerdynamics President and Lead Facilitator
Natural gas production in the U.S. is booming. It reached its highest level in history at 91 Bcf/d in August 2019. Yet natural gas prices have remained mired in historically low prices below $3/MMBtu. So why does production continue to grow? And can current production levels sustain given such low prices?
Source: EIA
The breakeven cost of production is the average natural gas price at which a producer would need to sell its production to neither lose money nor make a profit. According to recent data from Bloomberg New Energy Finance, breakeven economics vary widely by production basin:
Source: Bloomberg New Energy 2019 Sustainable Energy in America Factbook
It seems paradoxical that producers might break even with negative prices, but in some markets they can because they produce oil and/or natural gas liquids along with 
the natural gas. With certain types of wells, producers don’t have the option of producing just the most valuable commodities but must produce all fuels at once. In some basins such as the Permian and Eagle Ford in Texas, natural gas is produced as a by-product of oil.
The wells are also wet, meaning that significant quantities of natural gas liquids (NGLs) such as butane, ethane, and propane are also present in the gas stream. Thus, as long as prices hold for oil and NGLs, producers can afford to pay someone to take the natural gas away and still make money.
Even in basins such as the Marcellus Basin, which is primarily focused on natural gas, the economics vary significantly based on the presence of NGLs. This is demonstrated by the Marcellus Wet (wells with NGLs) breakeven price of $1.77/MMBtu compared to a price of $2.43 for a dry well (limited or no NGLs). This means that a producer of a wet gas can do quite nicely with a market price of $2.25 while a producer with a dry well will lose money.
Why don’t producers simply keep the valuable stuff and release the natural gas into the air or burn it at the wellhead in a process called flaring? Some producers do, but doing so results in significant greenhouse gas emissions, so many producers restrict the practice either as a matter of corporate policy or due to regulations. Many continue to find a market for the gas even if it isn’t contributing to profit in the short run as demonstrated by a recent run of negative prices in the Permian Basin.
The value associated with producing a well varies depending on the ratio of oil, gas, and NGLs, as well as the market price of each commodity. Prices vary significantly over time, requiring producers to continually evaluate whether to keep drilling more wells. Also banks must continually evaluate whether to keep lending producers the money to drill wells.
Source: EIA
Given this background, we circle back to the question of whether or not robust gas production is sustainable. It partly depends on oil and NGL prices. If those fall significantly (NGL prices have fallen in recent months), gas production will decline. But perhaps more importantly, wet and associated plays may not offer sufficient production to satisfy the expanding gas demand in North America. If that is the case, most dry gas wells will need prices between $2.70 and $3.20 to be profitable. Thus, producers of dry gas likely can't keep financing new drilling, which means gas prices must rise above the $3.00 barrier to attain enough production to meet demand.
Want to learn more about North American natural gas markets? Gas Market Dynamics, one of Enerdynamics' online learning paths, provides an overview of today’s monopoly and competitive gas markets found in North America.
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