HardAssetsInvestor

Written by Lara Crigger  |

December 02, 2010

Natural Gas: Will New Bans Affect Prices?

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Yesterday, state and local governments passed bans on various forms of natural gas drilling. But will they be enough to move prices?

As Brad discussed yesterday his Weekly Oil Roundup, we saw a bit of a surprise in this week's Energy Department inventory report. But the drama wasn't contained to just crude oil: Natural gas inventories also caught analysts off guard.

Stockpiles still dropped—as they should, as the U.S. hunkers down for the cold winter ahead—but natural gas inventories didn't drop nearly as much as expected. According to the report, stockpiles decreased by just 23 billion cubic feet; analysts had predicted closer to a 29 billion cubic feet drop.

"I don't think the weather patterns have changed to make it cold enough to move the needle on storage levels," William Costello, an analyst with Westwood Holdings Group in Dallas, told Bloomberg.

But who cares, right? What's 6 billion cubic feet among friends?

It matters because natural gas reserves still hover near 40-year highs, our stockpiles swollen with new shale gas field production. Hydrofracking, a controversial new drilling technique that involves shooting a cocktail of water and chemicals into rock to release the gases trapped within, has revolutionized the way we produce natural gas in this country—and our stratospheric reserves reflect it.

That means, no matter how cold it gets this winter, those high inventories could keep natural gas prices holding in the $4-per-million-BTU range for the foreseeable future. Unless, of course, something changes.

Cue: Something changing.

Feds, States Change Mind On Drilling

Two big natural gas news stories came down the wires yesterday.

First, the Obama administration reversed its earlier decision to allow expansion of oil and natural gas drilling offshore along the eastern Gulf of Mexico and the Southeastern U.S. That's not to say Feds will ban any activity in those regions; U.S. Interior Secretary Ken Salazar said that instead, "the most appropriate course of action is to focus on areas with existing leases." The decision stands for seven years.

That's bad news for producers already wrestling with a de facto freeze on new well permits for existing leases while U.S. regulators debate stricter environmental and safety standards for drilling.

About 30 percent of our current domestic production of oil and gas comes from offshore rigs. Without the ability to lease new sites—or even build new wells on current sites—we could see that 30 percent production drop off considerably.

But offshore drilling isn't the only energy practice attracting lawmakers' eyes.