The Natural Gas Industry: 2012 Year in Review and Look Ahead

by Spilman Thomas & Battle, PLLC

In 2012, industry observers began to see a divergence in production activity in the Marcellus and Utica Shale region. Producers with liquids-rich holdings began to divert rigs from the dry gas areas to the Utica and western portions of the Marcellus where oil and natural gas liquids (NGLs) predominate. Dry gas production remained robust, however, as producers with substantial dry gas holdings continued their drilling programs to generate operating revenue or to secure their land investments. The shift in focus from dry gas to oil and NGLs was driven by sustained low natural gas prices coming out of last year’s unseasonably warm winter, along with the continued decoupling of natural gas and oil prices. Spot prices at Henry Hub were under $2.00/MMBtu for most of April 2012 and never closed over $4.00/MMBtu. By contrast, WTI spot prices remained comfortably above $85/Bbl for most of the year, and stayed over $100/Bbl during March and April when Henry Hub prices were at their lowest.

Looking ahead, it will be interesting to see whether natural gas can hold onto the price gains that it realized in the latter half of 2012, as this will give producers some degree of revenue stability that they require for continued development. Key to this is whether the United States experiences a more normal winter in 2012-2013 in contrast to the unseasonably warm temperatures experienced in 2011-2012. But, 2013 should also see demand-side gambits come into play that have the potential to sustain favorable price stability for natural gas producers. For example, will policymakers authorize large-scale export of liquefied natural gas to European, South American and Asian markets? And, if so, to what extent? Also, with President Obama’s reelection, regulatory pressure on the coal industry is expected to continue. Consequently, 2012’s trend of coal-to-gas switching among power plants is likely to continue as well. Further, 2012 saw the beginnings of a revival in American manufacturing as low domestic energy costs offset low labor costs in Asian countries, thus creating a pivot back to domestic manufacturing in chemicals and durable goods. As this trend gathers momentum, demand for natural gas and NGLs should continue.

As resource development continues in 2013, the legal issues related to that development will continue as well. Despite numerous studies demonstrating the safety of hydraulic fracturing, there still remains strident opposition to its use in some regions. Further, while some operators will continue to assess implementation of the U.S. Environmental Protection Agency’s new air regulations that apply to hydraulically fractured wells, the challenge to these regulations by the Independent Petroleum Association of America will continue. Finally, state and federal courts will entertain landowner challenges to traditional notions of property law and will continue to shape the contours of how old law mixes with new technology.

In closing, 2012 saw a widespread recognition of the truly transformative nature of the American energy industry. This transformation has occurred because of the industry’s development of unconventional reserves, first in natural gas and now in oil and NGLs. The realization of genuine North American energy security is closer than ever. 2013 will be an exciting year for American energy.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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