Low Natural Gas Prices Cause Industry Shift

The oil and natural gas industry is thriving, thanks to a dizzying array of technology that helps producers pinpoint new resource plays or reach reserves that could not be extracted just a few years ago.

But some of those companies have been undone by basic economics.

Natural gas prices have sunk so low that many industry observers say it is not economically feasible to continue drilling for it. Economist Steve Agee said a "perfect storm" of factors -- a record amount of gas in storage, rising production and a mild winter for much of the country -- led to natural gas prices to crash.

He said cutting back on natural gas production is a prudent business decision.

Industry giant Chesapeake Energy Corp. detailed its plans to curtail gas production, but observers say the shift has been under way for quite some time. Producers have gradually been moving away from natural gas for months, if not years.

Crawley Petroleum president Kim Hatfield said his company's shift began more than a year ago. "We started directing our efforts away from natural gas and toward oil back toward the end of 2010," he said.

Hatfield said there is no clear threshold for balancing the cost of drilling for natural gas with the potential returns because there are a variety of variables at play, but most producers have been forced to make such decisions.

He noted SandRidge Energy Inc.'s recent transformation from a natural gas company to one focused oil production.

Hatfield said it is more difficult to weigh such situations since drilling costs continue to rise as natural gas prices fall. "It really depends on the volumes," he said.

Agee, dean of Oklahoma City University's Meinders School of Business, said he has been told natural gas must be about $5 or $6 per thousand cubic feet for producers to make a positive return on their investment in a gas well.

Natural gas hit a 10-year low last week, but rose recently 2.1 percent to $2.601.

Agee said he expects mild weather to keep prices low, but low prices could spur demand for natural gas in areas like transportation and power generation. "This adjustment period may take several years," he said.

Hatfield said there is a bit of a silver lining for the industry, despite plummeting gas prices.

"I guess the good news is, as an industry, we're way too good at what we do," he said. "We've found a whole lot of natural gas."