Before Shale: The Supply-Demand Tightrope

Shale’s significance arises from the dilemma the United States faced only a decade ago as it became evident that natural gas was increasingly the fuel of choice for power generators, manufacturers, businesses and homeowners. Natural gas had strong appeal because of its low emissions, efficiency, versatility and comfort. Yet even as demand for natural gas was increasing and 90 percent of planned new power plants were proposed to be natural gas-fired, producers were facing significant regulatory barriers to accessing new areas, both offshore and onshore, that contained natural gas in “conventional” formations. Existing natural gas wells were maturing, requiring more time, dollars and technology to produce smaller volumes of gas.

By late 2000, demand had caught up to supply and achieved a tight balance. Weather, the economy and other factors could impact demand fairly quickly, but natural gas supply by its nature took longer to respond, resulting in price fluctuations. Customers adapted by using physical hedging tools, such as storage, as well as financial tools to manage volatility. In 2005, the shutting-in of nearly a quarter of U.S. production because of Hurricane Katrina provided a stark demonstration of the drawbacks of locating so much of the nation’s natural gas production in one geographic area. Supplies rebounded within a few months, but the underlying problem of access to natural gas supply was not addressed.

And then came the impact of shale – sometimes referred to as the “shale gale.”