ITR Experts Say: We're Setting Fire to a Competitive Advantage

US Oil and Gas Extraction Production is in Phase B, Accelerating Growth; during the 12 months through October, it was up 14.9% from the year-ago level. This production index, while useful, obscures the distinction between its two components – the more sought-after oil and the less-expensive natural gas, which is often a byproduct of drilling for the former. While natural gas is an important source of energy, its relatively low price means that producing, refining, and transporting it is not always economically viable. Instead, companies primarily after oil will often vent excess gas into the atmosphere or set it on fire in a process known as flaring.

In the Permian Basin alone, companies flared an average of 407 million cubic feet of natural gas per day during the third quarter of 2018, according to Rystad Energy. The Wall Street Journal reported back in August that gas flared daily in the Permian – worth roughly $1 million – would be sufficient to meet the needs for a state like New Hampshire, home of ITR Economics.

The third-quarter flaring reported by Rystad represents a record for the area, but the research firm estimates the level could rise to 600 million cubic feet per day next year. Flaring in the Permian Basin has been generally rising over the past decade. Amir Gerges, general manager of Royal Dutch Shell in the Permian, told the WSJ that production had outpaced natural-gas infrastructure.

Abundant natural gas is a primary contributor to the affordability of energy in the US. Domestic industrial electricity rates are roughly half the level of European rates and just one-third the level of the cost in Asia.

Utilizing more natural gas, instead of flaring it, will require additional capital investment in the form of pipelines and processing plants. New infrastructure, including pipeline capacity, is expected to come online in 2019, and will expand capabilities to bring this natural gas to energy markets.

For businesses that serve various energy markets, this investment suggests a new source of opportunity for the coming years. US Natural Gas Production during the three months through August was 13.4% higher than during the same period one year ago. Rising infrastructure capacity will make further rise in Production possible.

Firms outside the energy industry should consider the competitive advantages of plentiful US resources. Some businesses, for example, could take advantage of low natural gas prices by switching to liquefied natural gas (LNG) as a fuel source. To determine the optimal time in the business cycle as well as strategies for implementing such technological efficiencies, or to further examine this and other competitive advantages, please contact ITR Economics!

Lauren Saidel-Baker, CFA
Economist