Chesapeake Energy to cut natural gas output, as hydrocarbon nears record low prices
Strategic Sourceror on Monday, January 23, 2012
Natural gas prices have plummeted over the past decade, prompting at least one large U.S. producer to drastically reduce output of the hydrocarbon.
U.S. natural gas production has soared over the past decade, helping drive prices to exceedingly low levels. The biggest contributor to falling gas prices has been a surge in hydraulic fracturing, more commonly known as fracking.
Fracking is an exceedingly controversial issue in the U.S., as the federal government has thus far allowed states to enact and enforce laws governing the practice, in which thousands of gallons of water and chemicals are blasted thousands of feet beneath the ground's surface, which helps free natural gas stored in shale formations.
Public health and environmental scientists' assessments of the potential deleterious medical and environmental threats of fracking differ from those of oil engineers. Moreover, experts argue about the dollar value on total natural gas reserves in the U.S. Some oil engineers have pegged the figure at more than $4 trillion, while others have offered far more conservative estimates.
Nonetheless, the U.S. has rapidly become the world's biggest natural has producer on the strength of domestic fracking operations. The price of natural gas, which is considered to be a cleaner fuel than oil, has declined substantially. This has helped businesses trim operating budgets and rework spend management and indirect spend. It has also allowed companies to reallocate resources, as natural gas sourcing has become simple amid a glut of supplies.
However, Oklahoma-based Chesapeake Energy announced recently that it would reduce its natural gas drilling and production, citing the drop in prices. The decision from the energy firm underscores that while falling natural gas prices may be benefiting businesses and consumers, they are hurting drilling companies.
The Associated Press reports that Chesapeake officials decided to reduce natural gas output because low prices made some of its drilling and production wells unprofitable. The energy giant said it plans to cut production 8 percent, which would essentially leave its output in 2012 unchanged from 2011 levels. In total, Chesapeake produces about 9 percent of U.S. natural gas.
Chesapeake's announcement could trigger a ripple effect among natural gas producers, according to some analysts. As the biggest natural gas producer in the world's largest generator of the hydrocarbon, Chesapeake holds an important position among energy firms. Its decision to scale back production, meanwhile, varies significantly from past years when it ratcheted up extraction amid a fracking boom.
While cold winters in 2010 and 2011 helped fuel natural gas price gains, this year's mild winters – especially in the Northeast and Midwest – spurred an uptick in supplies. In trading on Monday, natural gas prices hovered near $2.46 per 1,000 cubic feet. The hydrocarbon approached $2.30 late last week, its lowest level since 2002.
Though a boon for businesses and homeowners, lower natural gas prices have eroded profit margins at major energy companies, prompting Chesapeake to change course. Between 2010 and 2011, the energy giant increased natural gas production 13.5 percent. In 2011, it spent more than $3.1 billion on natural gas regions. However, the cut in output will enable it to implement a business cost reduction program, as it intends to invest approximately $1 billion this year.
Chesapeake executives affirmed the company would reduce production 500 million cubic feet of gas per day in specific drilling outposts in Texas, Arkansas and Louisiana. While the move is aimed at removing a glut of supply, experts said energy companies often reverse such plans at the behest of shareholders.