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Natural gas prices have surged over 70% during the past three months, fueled by increased air conditioning use, a switch from coal in power plants, and declining production rates.

The price for natural gas at Henry Hub, a junction of pipelines and storage facilities in Louisiana, has gone from $1.85 per million British thermal units in April to $3.14 Tuesday — a seven-month high.

“Hot weather forecasts and elevated cooling demands continue to provide a boost to the market,” Addison Armstrong, director of market research at the brokerage Tradition Energy, wrote in research note Tuesday.

Natural gas-fired power plants can be turned on and off relatively quickly, and as such are generally used by utilities to generate electricity during times of peak demand, like during a heat wave.

This June was the 14th hottest June on record, with temperatures nationwide two degrees above the twentieth century average, according to the National Oceanic and Atmospheric Administration.

U.S. cuts greenhouse gases despite do-nothing Congress

But that’s not the only reason behind the price spike.

The low prices seen earlier this year — they reached a 10-year low — prompted many utilities to switch from coal to natural gas for power plants in continuous operation.

In fact, electricity generated using natural gas was roughly even with coal for the first time ever in April, according to the Energy Information Administration. Historically, coal accounted for just under half of the nation’s electricity needs, while natural gas typically supplied just over 20%.

The low prices have also prompted many natural gas companies such as Chesapeake (CHK, Fortune 500), Devon (DVN, Fortune 500), EOG (EOG, Fortune 500) and Exxon Mobil (XOM, Fortune 500) to switch from natural gas exploration to exploration for oil.

Last April about half of the nation’s 1,800 or so drilling rigs were looking for oil while half were looking for gas, according to IA. By this May over twice as many were looking for oil, and EIA has reported recent natural gas production numbers slightly below levels seen at the end of last year.

Increased demand and lower production mean less natural gas is being stored. That storage number is a key barometer for natural gas traders. Armstrong said this week should be the twelfth consecutive week of below average storage rates.

But analysts caution that prices wont rise too far above current levels.

At $3 per million BTUs, coal once again becomes competitive as a fuel source.

And despite fewer drill rigs seeking out natural gas, plenty of the stuff still comes up along with oil in many oil wells.

“The current price level [for gas] is overvalued and is likely to decline and settle back,” Michael Fitzpatrick, editor of the industry newsletter the Kilduff Report, wrote Tuesday.

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There is a glut of natural gas. Everybody knows that. There’s so much of the latest multi stage hydraulic fracturing going on from New York State to Texas and all places in between, prices will be low forever. But just as a full watering hole can deplete quickly the current gas storage glut can recede. If fact it already has been and at an alarmingly brisk pace and there may be a confluence of other events which could hasten the process. Consider this. The weekly EIA natural gas storage numbers reported each Thursday came in with a 28 billion cubic feet (bcf) injection. The inventory increase last year at this time was 67 bcf while the five year average accretion was 74 bcf. So true that one week does not a trend make. But this makes eleven straight weeks that have experienced below average storage injections. After Thursday’s numbers were released inventories stood at 3.163 Trillion Cubic Feet or 19.2% above last year but only 17.5% above the five year average. A seemingly decent cushion until you consider as recently as May 10 stockpiles were 48.4% and 49.9% ahead of the previous year and the five year averages respectively. So the question becomes, why are rates of gas injection dropping so precipitously unless the shale plays are actually unable to produce the necessary incremental volumes.

A Little History And Some Facts

Natural Gas production in the US was declining steadily until 2005 into what many perceived as an irreversible trend with an implication of persistent shortages. Enter the knight in shining armor; horizontal resource drilling. Daily gas production increased from 51 bcfd in 2005 to an average of 66.2 bcfd (billion cubic feet per day) in 2011. Some months have even spiked above 70 bcfd.  The natural gas rig count peaked at 1,600 in the summer of 2008. No coincidence gas prices topped out concurrently the first few days in July at $13.28 per mcf. So in six plus years while gas drillers were able to increase daily supply by 30% demand has increased only half that amount. The result has been a spot gas price that bottomed on April 17, 2012 at $1.89 per mcf (thousand cubic feet). But the pendulum is now trending in the other direction as power suppliers and the transportation industry begin to capitalize on the low price of natural gas.

The EIA (US Energy Information Association) has prognosticated a 2012 daily production average of 68.98 bcfd and consumption of 69.91 bcfd. Methinks those production numbers extravagantly optimistic and yet the agency continues to publicly adhere to them. Firstly, actual output over the last two months has already slipped to a bit under 64 bcfd.   Next, the natural gas rig count collapsed to 486, a thirteen year low, on June 22 and had made only minimal recovery to 518 rigs as of last week. Lastly, numerous major gas producers such as COP and CHK have shut in parts of their dry gas production and are switching their drilling programs away from dry gas to natural gas liquids and oil. Conversely, consumption may exceed EIA projections. Here’s why. Hotter than usual temperatures across much of the country especially in the population heavy northeast is causing excess energy demand. Another thought provoking data point from the EIA last week reported that for the first time in history natural gas fired power plants generated more electricity than coal fired plants. That’s quite a milestone. Each now comprise 32% of U.S. power generation. Gas is cleaner and at current prices is a cost effective coal alternative. Adding to short term supply pressures, four nuclear power plants are down, all effecting east coast residents. Though still in early stages numerous fortune 500 companies such as Fed Ex and UPS are transitioning to natural gas powered trucks. A national fueling system is near completion with locations along the major interstate arteries.

Drilling Economics

The earliest horizontal resource drilling was done by Mitchell Energy (now part of DVN) in 2005 in the Barnett Shale which is in and around Fort Worth, Texas.  Horizontal fracturing into shale has become much more sophisticated since those early days, with enhanced recovery of gas in place, although at much greater cost per well. An average 20 stage horizontal dry gas well in the South Texas Eagle Ford Shale or the East Texas/North Louisiana Haynesville play may cost $8.5 to $12 million. It will be drilled to vertical depths of 8,000 to 12,000 feet below surface. I have examined production data for over 50 wells that have been operating for 9 months to over a year and a half. Now let’s do some arithmetic. Let’s assume an average well cost of $10 million with an estimated ultimate recovery (EUR) of 6 bcf.  At $2.00 per mcf gross expected revenues are $12 million and at $3.00 mcf revenues are $18 million and so on. Don’t forget about the expense side of the ledger. There is the mineral owner royalty payment which is often ¼ or 25% which comes right off the top. There are state severance taxes which vary from state to state but in Texas are 7.5%. There are ad valorem taxes of about 2% as well. Operating expenses will average $120,000 to $160,000 per well per year. Then the gas must be “cleaned” to make it conform to pipeline specifications. The highly toxic H2S (hydrogen sulfide) and CO2 (carbon dioxide) are removed along with excess water to get the gas below 7 ppm (parts per million). Only then is it ready to go into a KMP or EPD main high pressure sales pipeline. Estimated price tag for this gas prep is at least $.25 per mcf. Then after some number of years the well pressure will fall below certain levels and a compressor will need to be installed. If gas prices are low (like now) and the well’s gas production has declined to a small fraction of its original flow rates, the calculation is made as to which is more economic; install the compressor or shut in the production all together. The latter is the decision reached by hundreds of producers across the country. You are welcome to check my calculations but you lose a whole lot of money at $2.00 gas, lose some money at $3.00 gas, and make less than a 5% return at $4.00 gas. And all this assumes you can make an average of 6 bcf per well. The debate on this issue is becoming quite spirited. Recent data now suggest that many of these deep multistage horizontal wells are declining at greater than anticipated rates of 80% to as much as 90% in the first year. This was the case for almost all the well data that I inspected. So this means if production began at 5mmcf (million cubic feet) per day that by the end of year one that number may be reduced to 500 mcf to 750 mcf per day. The equally consequential part of this dispute is how long does this production last. The certain answer is that nobody knows for sure. The technology is so new that there aren’t any deep (below 10,000 feet) multistage horizontals that have been on production for 10 years or even 5 years. But if, and it is if, the “tail” in these shale wells fizzles out and the well becomes uneconomic after 8 or even 12 years instead of the projected 25 year life then the entire economics of the shale boom must be revisited.

Energy Content And Economics

The British Thermal Unit (btu) equivalent of one barrel of oil equals six thousand cubic feet of natural gas. Therefore if gas at $3.00 per mcf were to be at energy parity with oil, then oil would sell for $18.00. But WTI sells at $90 bbl. So gas must get more expensive or oil will get cheaper. As the gas rig count dwindles and evidence mounts that at least some of the shale plays are depleting much faster than projected, the result has been the aforementioned much lower than normal stockpile injection rates. With the disparity between oil and gas prices at such extremes, all available capital will continue to flow into drilling for gas liquids and oil. Some of the remaining dry gas drilling is probably just to maintain lease rights.  Newton’s 3rd Law of Thermodynamics says for every action there is an equal and opposite reaction. Natural Gas at $13.28 is too high and the April price of $1.89 is too low. The rubber band is becoming stretched in the direction of tight supply. It’s too cheap to drill for, so supplies will further dwindle until inexorably the shortage occurs and prices spike irrationally higher. That time is sooner than later.

Catalysts

We had an abnormally warm 2011-12 winter season in the US which sank home heating gas demand to extremely low levels. Was it because of an El Nino effect or did global warming play the pivotal role? Or, most likely, it is a confluence of several factors. Whatever the cause, the jet streams carrying the traditional cold temperatures and accompanying snowstorms didn’t reach south as far and as often as usual. Conversely, Europe had an abnormally cold winter last season suggested causes being the abstruse North Atlantic Oscillation Index, low solar activity and attendant low sunspot numbers and associated solar magnetic flux. You understand, right.

Natural Gas prices have spent all of 2012 below $3.00. Just the past three trading days, perhaps starting to reflect the fundamentals discussed herein, have seen spot prices nudge above the $3.00 level.  So combine 13 year low gas rig counts, declining production levels with resultant ultralow storage injections, shut in gas production, faster than anticipated shale well declines, persistent switching from oil and coal to cheaper and cleaner gas alternatives…..Then consider unending hotter than normal summer temperatures, continued greater than normal nuclear plant outages, a hurricane or two that knocks out Gulf of Mexico natural gas production for a week or two, and a La Nina induced cold winter…….any one of these can light the fuse that pushes the tenuous supply/demand balance into cardiac arrest. That’s the chain and it’s going to lead us to $8.00 mcf natural gas by the approaching winter.

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America has a wealth of natural gas in the ground. So, how do we get it into our cars?

The recent deluge of low-cost shale gas is already changing the way the country runs. Electric utilities are turning to gas to power their turbines, and chemical companies that rely on the fuel are coming back to the U.S. after years of investing overseas.

But the holy grail is transportation.

Every day, we consume 70% of our oil getting from place to place—and produce more than 30% of our greenhouse gases along the way. If we could run our vehicles on natural gas, it could kill two birds with one stone: Not only is natural gas a lot cheaper than oil right now, but its emissions are much cleaner than gasoline or diesel.

“This abundance of natural gas is something we weren’t expecting as a country, but it’s here now, and it’s a gift we should take advantage of,” says Steven Mueller, chief executive of Houston-based natural-gas producer Southwestern Energy Co. “There’s huge savings here and a way to help to environment.”

Natural gas is already making big inroads in the commercial-truck market. Delivery companies, trash haulers and other firms that operate big fleets are switching to natural-gas vehicles to save on fuel costs. But the really big leap—and the much more daunting task—will be getting passenger cars running on natural gas.

Cost is a big part of the problem: Natural-gas cars are more expensive upfront, thousands of dollars more than regular models. That’s a tough sell anytime, never mind in this economy.

Public refueling stations, meanwhile, are few and far between. And there’s the question of consumer psychology: How do you convince drivers that it’s wise or even safe to put natural gas in their cars?

The barriers are significant, but pursuing natural-gas transportation is still worth the effort, according to a paper by Christopher Knittel, a professor of energy and economics at the Massachusetts Institute of Technology.

With the right policy incentives, he writes, natural-gas vehicles could “increase the nation’s energy security, decrease the susceptibility of the U.S. economy to recessions caused by oil-price shocks, and reduce greenhouse-gas emissions and other pollutants.”

Here’s a closer look at some of the challenges and how they could be surmounted.

Reinventing the Car

The big issue with building natural-gas vehicles is the fuel tank. Gasoline and natural-gas engines are relatively similar. But natural gas must be stored under high pressure—so the tanks must be stronger, heavier and larger. And that drives up the price. The only natural-gas passenger car sold in the U.S., the Honda Civic GX, costs about $5,200 more than a comparable gasoline vehicle and $3,600 more than the gasoline/electric hybrid Civic.

In other parts of the world, governments have mandated a switch to natural-gas vehicles, regardless of the higher cost of vehicles. In Pakistan and Iran, for instance, the governments made the change because the countries lack sufficient gasoline-refining capacity. Now the two countries have about 2.7 million and 1.9 million natural-gas vehicles, respectively.

That kind of mandate is all but unthinkable in the U.S. But there are efforts afoot to work around the fuel-tank issues to bring down the cost. 3M Corp. MMM +0.67% said earlier this year it is joining with Chesapeake Energy Corp. CHK +4.44% to develop natural-gas fuel tanks that use plastic linings wrapped in carbon-composite materials. The tanks could be 10% to 20% lighter with 10% to 20% more capacity than current natural-gas tanks, the companies said.

Meanwhile, researchers at the University of Missouri have developed a smaller tank that allows natural gas to be stored at a much lower pressure by keeping it in a material essentially made out of corncobs turned into charcoal briquettes. Early tests of the tank on a natural-gas pickup truck have worked well, according to researchers.

Another approach to the problem is economies of scale: If more natural-gas vehicles were sold, it’s likely that the costs would come down.

There aren’t any large-scale efforts under way to ramp up sales volume of passenger cars. But some natural-gas exploration and production companies have agreed to replace thousands of their existing pickup trucks used in the field with vehicles running on compressed natural gas, a form of the fuel popular in smaller vehicles.

Following discussions with the American Natural Gas Association, an industry group, Chrysler Group LLC said this year it will build at least 2,000 heavy-duty Ram pickup trucks that run on both CNG and gasoline. General Motors Co. GM -0.28% said it would offer similar vehicles in its GMC Sierra and Silverado lines.

Proponents also think a big part of the upfront-cost problem is perception: People, they argue, don’t realize how much natural gas can save them over the life of the vehicle. With a gallon of gasoline hovering around $4 in many parts of the country, the comparable amount of natural gas can cost about half as much at current prices.

Still, you may need to drive quite a while to make it pay off. Consider this analysis by Prof. Knittel of MIT: Assume a CNG-fueled car costs $5,500 more than its gasoline counterpart, and assume a $1.40-per-gallon price advantage for CNG. Given that, he says, it could take more than nine years before the car owner broke even.

That’s hard for the average car buyer to swallow. “The average person discounts any fuel savings beyond three years,” says Kathryn Clay, executive director of the Drive Natural Gas Initiative, a program funded by natural-gas producers and gas utilities.

Reinventing the Pump

Regardless of how big and bulky the fuel tank, if you can’t find a CNG station in your neighborhood, you’re not going anywhere. Of the 1,500 stations available in the U.S., only about half are accessible to the public; the rest are reserved for fleet vehicles. That’s a tiny fraction of the 118,000 public gasoline stations spread coast to coast.

Kwik Trip

A number of companies are currently setting up new fueling stations. These are on a very limited scale and serve mostly fleet vehicles, but some stations are in prominent public places, and advocates hope they’ll spark consumer interest in the vehicles. Apache Corp., APA +2.08% for instance, built a CNG refueling station at Houston’s Bush Intercontinental Airport to service a small fleet of CNG parking shuttles that the City of Houston operates.

The big barrier to setting up stations on a broad scale is cost. The average cost for building a gasoline station and convenience store in the U.S. was about $2.3 million in 2010, according to data compiled by the National Association of Convenience Stores. Adding the compressor and storage tanks needed for a CNG station can drive up the price by as much as $500,000—assuming the station can even hook into a natural-gas distribution pipeline. That’s a big investment when few people are filling up their tanks with natural gas.

CNG vehicle owners also have an in-home fueling option—an appliance called the Phill. About the size of a large upright vacuum cleaner, the Phill can be installed on the wall of a garage with access to a 240-volt, 15-amp electrical circuit and a natural-gas line. A flexible hose plugs into the car and fills it up over the course of about six hours.

So far, there hasn’t been a lot of consumer interest, largely because of the steep price tag: about $4,000, not including installation charges. (Why the price disparity between the in-home gadget and the one used at filling stations? The Phill is significantly slower and can’t handle multiple vehicles at once.)

Ms. Clay, of the Drive Natural Gas Initiative, says her group has surveyed some 40 companies to see if they’d be interested in developing a lower-cost in-home system. About a dozen expressed interest. “It we can get the units down to $1,000 to $1,500 and reliability over four to five years, it would probably be a game changer for the consumer market,” Ms. Clay says.

Pietro Bersani, chief financial officer of Fuel Systems Solutions Inc., manufacturer of the Phill, says the company has been able to drive down the cost of the units by about 30% in recent years, but it will take more orders to help prices fall further.

That’s why the company will look to launch more programs like the one it just started with utility Atlanta Gas Light Co.: Natural-gas-vehicle owners can have a Phill installed in their garage free by agreeing to a five-year lease at $60 per month.

Reinventing the Fuel

Some in the industry are tackling the natural-gas transportation challenge another way—by turning natural gas into a fuel that could be used in cars with conventional engines and pumped at regular filling stations. The trouble, once again, is cost. The technology to turn natural gas into a low-sulfur diesel fuel was developed long ago in Nazi Germany, but it continues to be an expensive process that has limited its success.

Last year, Royal Dutch Shell RDSA +2.33% PLC opened its massive Pearl Gas-to-Liquids project in Qatar. The nation has substantial natural-gas resources—much more than its utilities need—so the government wanted to find a use for the excess fuel. The project now produces enough diesel from natural gas per day to fuel 160,000 cars as well as additives for jet fuel and feedstocks for a wide range of other products. But the project wasn’t cheap, at $18 billion.

Shell is considering a similar plant in Louisiana, where it hopes to draw upon the abundance of U.S. natural gas and take advantage of the full range of other Shell businesses in the region that might benefit from the plant’s output. That project could cost up to $10 billion, but the company hopes lessons learned from building Pearl will help keep those costs down.

Dallas-based chemical firm Celanese Corp. CE +4.35% has started to produce fuel-grade ethanol as a substitute for the corn-based ethanol from a plant in Clear Lake, Texas. But the company doesn’t expect commercial-scale production in the near future.

In Silicon Valley, Siluria Technologies Inc. has figured out how to turn natural gas into ethylene, a feedstock that can be used to make a wide range of fuels and other products. The technique involves a genetically engineered virus that coats itself with a metal that serves as a catalyst.

Siluria President Alex Tkachenko says it remains a laboratory-scale process for now, however, and won’t be commercial anytime soon.

Reinventing the Driver

Beyond the chemical, mechanical and economic challenges of getting natural gas into the vehicle fleet, there are psychological barriers. The average person doesn’t think about natural gas when thinking of alternative vehicles, says Mike Omotoso, senior manager for LMC Automotive U.S., a research firm. “They might think of diesels, but they mainly think of gas-electric hybrids or plug-in electrics. They just aren’t aware of natural gas.”

Much of how the public will react is unknown. Will there be safety fears? Will people be willing to use the same fuel that heats their houses to run their cars? There’s no wide-scale effort to answer those questions.

The arguments that will win over buyers aren’t clear either. Honda used the cleaner-emissions pitch when its Civic GX came on the U.S. market in 1998, says Brad Johnson, corporate fleet director with Pacific Honda in San Diego. Now, he says, buyers seem more interested in saving at the pump and using a fuel produced in the U.S. Honda is also promoting the fact that CNG vehicles can drive in high-occupancy-vehicle lanes on California freeways.

Even though consumers are slow to adopt natural-gas passenger vehicles, at least a few gas retailers are optimistic that if they build it, drivers will come.

Love’s Travel Stops & Country Stores, of Oklahoma City, plans to open 10 retail outlets with CNG pumps this summer, thanks to a partnership with Chesapeake Energy.

And Kwik Trip Inc., an operator of gas stations and convenience stores, opened its first CNG station aimed at passenger-car drivers in La Crosse, Wis., this spring, with plans for several more.

“It’s attractive to customers because it’s a domestic product, there’s a steady supply, and the price is right,” says John McHugh, Kwik Trip’s communications manager. “If we can offer the consumer a value, we know people will jump on the bandwagon.”

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The International Energy Agency (IEA) reports: Natural gas is well on its way to a bright future, according to a new report from the International Energy Agency (IEA) that projects China will more than double consumption over the next five years while lower prices from the unconventional gas revolution will continue to benefit the United States.

The report, Medium-Term Gas Market Report 2012, released today at the World Gas Conference 2012, says China will become the third-largest gas importer behind Europe and Asia Oceania, driving a 2.7% average annual growth in global gas demand through 2017 (up from the 2.4% annual growth rate predicted in last year’s report). During the period, North America will become a net LNG exporter, while Japanese imports will increase, although by how much will hinge on the country’s nuclear policies.

Medium-Term Gas Market Report 2012, part of a series of IEA medium-term market reports also featuring coal, oil and renewable energy, presents detailed forecasts for the next five years of sectoral demand by region plus supply and trade. An in-depth analysis addresses infrastructure investments in LNG and pipelines.

The release of Medium-Term Gas Market Report 2012 comes a week after the IEA issued a special report, Golden Rules for a Golden Age of Gas, which looks at the environmental impacts of unconventional gas production and how those impacts are being – and might be – addressed over the next 25 years.

“The Golden Age of Gas has dawned in North America , but its continued expansion worldwide depends on producing gas and bringing it to the market in a way that is friendly to investors and society as a whole,” IEA Executive Director Maria van der Hoeven said during the launch of Medium-Term Gas Market Report 2012. “As gas competes against other energy sources in all market segments, notably in the power sector, pricing conditions are a key element to keep it competitive everywhere. This medium-term report aims to facilitate investor decisions by providing a timely, in-depth analysis of the current trends and what we expect to take place over the coming five years.”

While Medium-Term Gas Market Report 2012 sees growth for natural gas in most regions, low economic growth, relatively high gas prices and strong growth of renewable energies will limit demand in Europe . Successful and timely developments of new resources should lift gas demand in the Middle East, Africa and Asia.

The report identifies other future sources of supply, with most incremental gas production coming from the Former Soviet Union (FSU) and North America . Further growth in unconventional gas will come mostly from shale gas in North America plus tight gas and coalbed methane (CBM) production elsewhere. Shale gas developments in other regions are likely to be concentrated in China and Poland.

Other key findings of the report include:

A quarter of new gas demand will come from China , another quarter from the Middle East and other Asian countries together, and a fifth from North America.

Low gas prices will result in gas generating almost as much electricity as coal in the United States by 2017.

Global gas trade will expand by 35%, driven by LNG and pipeline gas exports from the FSU region; most of this expansion occurs from 2015 onwards, following a period of further tightening of global gas markets.

Natural gas is the most important commodity with no global market price yet. Divergence among regional gas prices will decline but remain a feature of global gas markets. The emergence of a spot price in Asia would aid regional producers and buyers.

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Credit ratings in the oil and gas sector will remain relatively stable in 2012, credit rating agency DBRS said in a report released Thursday even as oil traded at its lowest level of the year.

DBRS said that capital spending is “back on track” with the industry focusing on oil and natural gas liquids development.

“Capital expenditure grew significantly since a low point in 2009 when many companies scaled back spending to provide flexibility during the financial crisis,” DBRS said in a report.

“In North America, the majority of capital spending is allocated for high-margin oil and liquids developments, shifting away from low-margin natural gas drilling.”

Vivid memories of the 2008 financial crisis have prompted many companies to maintain conservative balance sheets, but operating cash flows for last year have surpassed the peaks of 2007 and 2008, the agency said.

A variety of factors including reports that the U.S. economy is growing slower than expected and China’s manufacturing sector is slowing down have weighed on oil prices in recent weeks.

The continuing European financial crisis as well as an easing in tensions over Iran’s nuclear program have helped cool prices.

The benchmark crude price, which has lost 17 per cent of its value in May alone, fell another $1.29 to close at US$86.53 in New York, while Brent crude lost $1.60 to $101.87 per barrel in London.

The price of natural gas was up less than a penny to $2.422 per 1,000 cubic feet on Thursday after dipping below $2 earlier this year.

Earl Sweet, senior economist at BMO Capital Markets, noted that investment intentions of oil and gas, as well as mining companies, earlier this year were very strong compared with other parts of the economy, but noted that has likely cooled.

“I’m sure some of those oil and gas and mining companies might be scaling back their investment plans a bit,” Sweet said. “But all those projects are long-term in nature and the companies basically have in mind a long-term price, which is lower than the prices we saw a few months ago and maybe not all that different from what they are now.”

He said a bit of a slowdown wouldn’t be all bad news as the more marginal projects would be affected and it would ease pressures on raw materials and labour.

DBRS said that assuming continued favourable prices for natural gas liquids, most of the companies should remain strong enough to support a high level of capital spending and growing dividends.

“Demand from Asia is the main driving force behind strong commodity prices and production growth,” it said. “Over the past decade, oil consumption growth in Asia has significantly outpaced production growth in the region, creating a supply-demand imbalance and placing upward pressure on global prices.”

The report said many producers are helping fuel growth through collaborative investments and Canada has been attractive for foreign investment in oil and gas in the form of acquisitions and joint ventures.

“As capex costs have increased, companies have found growth and increased flexibility in large spending projects through joint venture transactions and strategic alliances,” the report said.

“Embracing sharing among partners of technology resources and technical expertise, along with information and best practices, has allowed projects too ambitious for a single company to be realized though collaboration.”

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Energy intensive industries in Europe and Asia are becoming increasingly envious of the huge competitive advantage their U.S. rivals have gained from a boom in natural gas production.

The gap between U.S. and international gas prices has expanded to all time highs, giving American industries a competitive advantage that could be worth as much as $1 billion a day.

Plans are underway to export gas from the U.S., which could narrow this gap, but they will be several years coming and likely to be limited by political pressure to preserve the low energy price advantage for American industry.

The boom in production of natural gas trapped in shale rock, which has been unlocked by new technology, has driven U.S. gas prices to 10-year lows. This has proved a huge blessing for big industrial users of natural gas.

Petrochemical companies have seen their growth prospects transformed. A report from the U.S. National Association of Manufacturers said cheap supplies of natural gas could help its members reduce their expenses by as much as $11.6 billion a year through to 2025, helping them create a million new jobs.

Users of electricity have also gained, as cheap natural gas has displaced coal at many power plants. Households using natural gas to heat their homes, or gas-fired power to light them, have seen their bills fall and disposable income rise.

Other parts of the world have seen no such benefit. In fact, the gap between U.S. gas prices and those in Europe and developed Asian economies has never been higher, said Barclays in a note to clients.

“If North American natural gas prices matched those in Japan, it would equate to an uplift of $1 billion a day,” Barclays said. The gap with Europe is smaller, but still worth around $700 million a day.

So there is plenty to be jealous of in Europe, which is already lagging U.S. economic growth. Business leaders are starting to sit up and take notice.

“The fact that energy is cheap in the U.S., and probably will be for a long time, is changing the game,” Jean-Pierre Clamadieu, Chief Executive of Franco-Belgian chemicals giant told the Financial Times last week. “Electricity’s getting more and more expensive in Europe, and some of the decisions that have been announced regarding nuclear energy production will certainly move the price in the wrong direction.”

There is little Europe can do to overcome this disadvantage in the short term.

There are plans in the U.S. to build facilities that would liquefy natural gas by cooling it and shipping it overseas, potentially narrowing the gap between U.S. and international prices. However, the first LNG export terminals will only begin to operate between 2015 and 2017.

Even then, the scope for exports from the U.S. may be limited. “The U.S. Department of Energy is in the unenviable position of balancing the desire of the oil and gas industry to export spare gas…with the demands of consumers to limit the effect on U.S. gas prices,” said Barlcays.

Senior executives from oil companies Total SA and Royal Dutch Shell PLC, both of whom have shale gas operations in the U.S., said last week that they believe the government will limit LNG exports in order to maintain the domestic pricing advantage.

All that remains is the hope that Europe could one day mirror the U.S. boom in shale gas production. Potentially significant shale gas resources have been discovered in the U.K. Several companies, including Chevron Corp. and Shell are looking at prospects in Poland and Ukraine.

But, most analysts believe that a boom of the sheer speed and scale of that seen in the U.S. is unlikely.

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The United States is on the verge of an economic “renaissance” thanks to abundant shale gas — and that demands a smart energy policy, Dow Chemical CEO Andrew Liveris said Thursday.

“The discovery of shale gas is an American manufacturing renaissance if handled well,” he said on CNBC’s “The Kudlow Report.” “It makes America a low-cost jurisdiction for any energy-intensive manufacturing of the value-add kind. One dollar of gas can create $8 to $9 of the value-add kind.”

Earlier, Dow announced it was building a $1.7 billion ethylene production plant in Freeport, Texas, scheduled to open in 2017.

The facility is part of Dow Chemical’s $4 billion plan to expand production of ethylene and propylene, products of shale gas extracted via fracking methods.

The company estimated the Texas project would employ up to 4,800 construction workers. Liveris also said that the plant would create 3,000 to 4,000 new jobs, as well as 35,000 indirect jobs.

“We’re still short of being the America we can be,” he said. “But we’re on our way, thankfully, due to the American oil and gas industry giving us cheap and abundant energy.”

Natural gas is so abundant, in fact, that the United States now has a 100-year supply, Liveris noted.

Commodity prices have seen a steady decline over the past year, falling from the $5 MBTU levels to below $2.

Natural gas prices dipped 2.5 percent for the day, trading at $1.90 per million BTUs for May delivery — a level Liveris called “artificially low” and suggested they would trend back to the $4 to $5 range.

“The United States could become an investment economy quickly here if we handle our policy environment — especially around natural gas — smartly,” Liveris said.

Energy, regulatory, tax and education policies, he argued, would help the industry and manufacturing on a broader scale.

Liveris praised the Obama administration for its regulatory climate but said more could be done.

“The administration’s made good progress on that. These are all forward looking,” he said. “We need to go back on some of the regulations that are outdated and do reform around those regulations, especially in the EPA, FDA context.”

But one policy area was most important to him.

“Energy policy, and what we do with our natural gas, in my mind, trumps those four in the here and now,” he said. “It could bring about an American job renaissance in next several years. It’s short-term, and we can do it.”

Original Article