US fracking: don’t dash for gas

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Shale Oil & Gas updates

Natural gas prices are surging. In Europe, they hit a record high this month. In the US, they are at a level last seen in 2014. In the past, US producers responded to big price jumps by ramping up output. This time around, the law of supply and demand may not apply so smoothly.

Last year was an annus horribilis for North American energy producers. More than 100 oil and gas companies declared bankruptcy as the pandemic plunged the sector into one of the worst downturns in a generation. 

Survivors remain under pressure from shareholders to curb spending and repair battered balance sheets. Banks have cut lending while capital market investors have spurned drilling campaigns. As a result, US natural gas producers are in no hurry to ramp up activity again.

The number of rigs prospecting for gas has stalled at about 100 since spring, despite a near-doubling in gas prices during the period. The last time US gas prices were above $5 per metric million British thermal unit — in 2014 — there were three times as many rigs in operation, according to EIA data.

Investors have rewarded companies that have exercised financial discipline and prioritised profits over production. Shares in EQT, the country’s biggest gas producer, have more than tripled from pandemic lows. Range Resources’ stock is trading at $19 compared with $2 just 17 months ago.

There are other reasons for drillers to sit on their hands. Muted crude price gains lessen the incentive to start new drilling. Oil production produces natural gas as a byproduct. Steep freight rates mean it makes less financial sense to increase output for export. There is also politics to consider: US manufacturers want the Biden administration to reduce exports of liquefied natural gas to protect domestic supplies.

The gas price spike presents frackers and their investors with their sternest self-discipline test so far. Price strength can be shortlived when it depends on an unusual confluence of factors limiting supply. Drillers that hold their nerve and hold back expansion will be better long-term investments than those that dash for gas.

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