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How Natural Gas Is Changing Global Energy Market

Never before has natural gas in the U.S. been both so cheap, and abundant.

Natural gas futures have been trading at a decade low, below $2.50 per million BTUs, and government data this week showed inventory levels 45 percent above the 5-year average. Some traders believe the price can go even lower, before it heads higher.

"The industry is realigning. You have low natural gas prices and prices will stay low for awhile," said Kenneth Hersh, CEO of NGP Energy Capital Management. "There's such a surplus in the market and the system right now, so it may take several years to wear that off."

Hersh said the price will move higher—to about $4 per million BTUs—as supply stabilizes and the market goes back to pricing in replacement costs.

The natural gas boom will be a major topic of discussion at the CERA Week energy conference, starting Monday in Houston. Hersh is one of the speakers.

“Where natural gas prices are now kind of resets the economics for the whole energy market place,” said Daniel Yergin, chairman of IHS CERA, the energy research and advisory firm that hosts the conference. He is also CNBC's analyst on global energy.

The rapid growth in natural gas production that has been reshaping North America’s energy landscape, has in a few short years turned the United States into a potential exporter of natural gas from a country on the cusp of becoming a major importer.

"The U.S. is the largest natural gas producer in the world. We now have one of the largest supplies in the world," said Hersh. "We're the third largest oil producer. We're the largest coal supplier. We're not a resource poor country."

The growth in gas production is credited with creating thousands of jobs and could create more, as companies reconsider manufacturing in the U.S., with natural gas as a fuel.

It is also not without controversy, as new extraction methods are increasingly raising environmental concerns. There is currently natural gas production in 32 states, and it has turned states, like Pennsylvania, into major gas producers.

International Energy Agencychief economist Fatih Birol recently said the world has America to thank for this “golden age” of gas, where productive natural gas finds are now being made from China to the Middle East, all because of technology pioneered in the U.S.

Hydraulic fracturing, or “fracking,” and horizontal drilling are a big reason for the boom.

Fracking, or the use of highly pressurized water, sand and chemicals to break apart rock, releasing the gas inside, has resulted in a surge in natural gas supply. Some estimates put that supply at 100 years worth, while just a few years ago, the U.S. was on the road to becoming a major importer of liquefied natural gas from the Middle East.

"Just a couple of years ago, the development of unconventional gas was a silent revolution taking place in the United States, but it is now having widespread effects on global energy markets," Birol noted. "The prospects for gas demand, pricing and trade patterns have all shifted significantly and there is now a surge of interest from countries all around the world in improving their security of supply through exploitation of unconventional gas."

But unconventional gas extraction is not without its problems, or critics.

"There are always two sides to a coin," Birol said in an email. "While the process of hydraulic fracturing has been around for decades, the rapid increase in the number of wells in the United States and the large number of companies who drill them has been accompanied by growing concerns about the environmental effects of the exploitation of unconventional resources. Land use, water scarcity, pollution of water supplies and greenhouse gas emissions are increasingly being scrutinized."

Birol said the environmental concerns need to be addressed, but the the benefits of this new natural gas production are significant, particularly as natural gas increasingly replaces coal in the energy mix, lowering carbon emissions.

"Industry practices are much more uniform than people think," Hersh said. "I think the fracking issue will end up being resolved in more oversight and more reporting, which will just add a layer of cost. It's too important an industry...and it has too many jobs associated with too much economic benefit, that it won't be killed."

The U.S. Energy Information Administration says there is now 2,200 trillion cubic feet of recoverable gas in the U.S., while the country consumes about 1 percent of that annually, or 22 to 23 trillion cubic feet a year.

“Total shale gas production is increasing in terms of total U.S. production. We’re a little over 30 percent,” said John Staub of the EIA. Just a dozen years ago, shale gas provided about 2 percent of U.S. natural gas production.

There's another side benefit of the gas production, the impact of which has yet to be seen.

"What's been a bigger surprise is what's been coming along with the natural gas itself—the natural gas liquids," said John Kilduff of Again Capital. "It's been a recent phenomena, but it's enough to put it on the radar screen."

Natural gas liquids are used in plastics production and are the equivalent of a high grade light crude.

The economic impact of the gas boom is difficult to measure and has resulted in all kinds of forecasts in terms of employment.

President Obama pushed for drilling for shale gas during his State of the Union speech as a way to boost the economy. He said the industry could create more than 600,000 jobs by the end of the decade.

J.P. Morgan economist Michael Feroli recently studied the impact of the natural gas boom on the economy and found it is not significant enough to break the economy out of its current growth trend.

"It's certainly a positive. No doubt about that. The question is whether it's meaningful enough to really alter the contour of the expansion," he said.

The direct impact on hiring from the energy industry alone has not been huge, as the industry is not highly labor intensive, Feroli said. He notes that over the past two years, hiring by the sector has grown by an average 6,000 per month. The oil and gas industry employs 724,000 workers, or 0.5 percent of the total nonfarm employment.

Natural Gas
Natural Gas

But a clear impact from the energy industry shows up in capital expenditures. Feroli said investment spending for structures and machinery for oil and gas extraction amounts to about $160 billion—10 percent of all business capital expenditures. A decade ago, the industry's share of cap-ex was just 4 percent.

The impact on the consumer is also unclear. However, IHS CERA calculates that the average American household stands to save nearly $1,000 this year because of cheaper natural gas used for heating, cooking and in electricity generation by utilities.

The CERA Week conference runs from Monday to Friday, and is one of the global energy industry’s biggest events. The situation with Iran and international sanctions against it will be a major topic of discussion.

“The environmental debate about hydraulic fracturing will be part of the conference,” said Yergin.

The first day of CERA Week focuses on energy policy in an election year, and it flows from oil industry discussions in the first day, natural gas in the second day to sessions on electric power, renewables, and the future of energy later in the week.

Dozens of industry CEOs are among the approximately 300 attendees, from all aspects of the energy industry and from governments around the globe. Some of the key speakers include Exxon Mobil CEO Rex Tillerson; Royal Dutch Shell CEO Peter Voser; ENI CEO Paolo Scaroni and General Electric CEO Jeffrey Immelt.

Renewables will also be a major topic. “Wind today is almost becoming a conventional energy source,” said Yergin. “There’s been tremendous progress over the last ten years in terms of scale and impact.”

Many see natural gas as a bridge to a future when the world is less dependent on fossil fuels, which create greenhouse gases.

“Cheap gas has created more pressure for renewables,” said Yergin. However, he said the industry is especially challenged in the era of fiscal austerity. “Fortunately, these renewables have come down in cost, but it adds to the competitive pressure on them.”

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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