Federal report details U.S. natural gas market

Last week the Federal Energy Regulatory Commission's Office of Enforcement released its assessment of domestic natural gas, electric and other energy markets.  The 2012 State of the Markets report (14-page PDF) describes how changes in both supply and demand led to record low pricing for natural gas at the same time as record high demand for that fuel.

2012 saw significant increases in the production of natural gas from shale and other unconventional resources. Domestic natural gas production grew 5 percent, reaching a new all-time record. Improved drilling rig efficiency boosted production from the Marcellus shale in Pennsylvania, Texas’s Eagle Ford shale, and the Fayetteville shale in Arkansas.  Shale gas production rose from 22 percent of total U.S. natural gas production in 2011 to 38 percent by the end of 2012.

At the same time, total average daily natural gas demand reached a new record, growing 4 percent to 70 Bcf/d in 2012. This growth in demand occurred despite a 10 percent drop in residential and commercial demand for natural gas due to the warm winter. Growth in demand for natural gas for electric power generation surged, driven by the low price of gas and tougher environmental regulations on coal-fired power plants. Generators’ demand for natural gas grew 21 percent over 2011, reaching a record 25 Bcf/d and surpassing residential and commercial demand for the first time in history.  Natural gas replaced coal in many places; coal-fired generation fell to the lowest level in 30 years. Since natural gas is often the marginal fuel in electric generation, lower natural gas prices generally resulted in lower electric prices across the country.

The combination of these changes in supply and demand led U.S. natural gas prices to a ten-year low last year. The spot price at the Henry Hub trading point averaged $2.74/MMBtu for the year, down 31 percent from 2011. Spot prices at Henry Hub ranged from a low of $1.82/MMBtu to $3.77/MMBtu at the onset of the winter heating season.  Most of the country enjoyed low natural gas prices, although pipeline constraints led to much higher pricing in New England, particularly in the winter.