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On April 27th natural gas prices fell to a recent low of $3.25 /Mcf but have since rebounded to the vicinity of $4.  The demand for natural gas, which has been falling lately in step with falling US industrial production, is the main reason for the decline. This decline in demand and the buildup of supplies in storage has resulted in a major drop in the number of rigs drilling for natural gas. From a high of 1600 rigs in the fall of last year, the number has now fallen 55 percent to 728. Many believe that a reduction of this magnitude will curtail supply to such an extent that prices will rise significantly this winter.

During the first part of this decade, as natural gas drilling moved to smaller gas pockets, it took more drilling to keep supplies relatively stable. Last year, shale gas changed the math. Yet the development of shale gas typically requires expensive horizontal drilling and fracing, further adding to the expense.

In recent years, very little LNG has been imported into the US, especially last year. As a major domestic producer with steady access to supplies from Canada, prices in the US generally have been too low to compete with the demand for LNG in European and Asian markets. This is now changing. With demand falling in the industrialized countries of Europe and Asia and with little capacity to store gas in most countries, an increased amount has been making its way to the US.

A sometimes underappreciated fact about the natural gas business is the large quantities of natural gas liquids that can be extracted from some wet gas streams. Gas produced in Qatar, a major producer, contains 48 barrels of liquids per Mcf of gas. This means there is so much money to be made from selling the natural gas liquids that there is enough left over to pay for liquefying the gas, transporting it and then regasifying it. In short, the producer of dry gas may be less concerned with how much it sells for so long as he can get rid of it. With global warming concerns, it is becoming unacceptable to flare natural gas, and unless one reinjects it into the earth (e.g., Prudhoe Bay, to boost oil production), the only way to get rid of the stuff is to find a market.

Between 1997 and 2011, LNG production will grow at an annual rate of 8.4 percent, nearly double what it did in the previous 14 years. There are serious implications the for the US gas industry. If LNG imports continue to increase, the prices will stay low and domestic drilling for gas is not likely to rebound anytime soon.