CryptocurrencyInvestingBanksReal Estate

Demand for U.S. natural gas has never been higher. So why is production slowing?

May 3, 2022, 11:00 AM UTC

Efforts by the West to reduce reliance on Russian energy have sent demand for natural gas from other countries soaring along with price. 

But some U.S. producers don’t seem to be taking full advantage of this opportunity.

Natural gas prices in the U.S. have more than doubled since Russia, supplier of 17% of the world’s natural gas and the largest gas exporter in 2020, invaded Ukraine in February. Western sanctions on Russia and energy companies terminating operations in the country since the invasion have created a gap in the global supply, one that the U.S. is in a prime position to fill.

The U.S. is the world’s largest natural gas producer, and domestic energy companies have even received the blessing of President Joe Biden to increase production and make up for the Russian supply gap.

But production in parts of the country is decelerating rather than ramping up to meet demand.

On an annual basis overall, U.S. natural gas production is still strong, but extraction rates in the first months of 2022 have begun to stagger, according to the U.S. Energy Information Administration. In January, natural gas production fell by around 2.5%, and in February, month-month output dropped by a full 10%. Falling extraction rates can be common in early winter months as new pipelines deal with bad weather, but the pace usually picks up after the first few months of the year.

Additionally, the annual rate of growth has been slowing relative to the natural gas boom of a few years ago. Between 2017 and 2018, natural gas production rose 12%, but between 2020 and 2021, production went up only 2%. 

Production slowdowns

The most productive natural gas region in the U.S. is in Appalachia, a massive reserve in the country’s Northeast spanning Pennsylvania, Ohio, and West Virginia. Last year, 31% of the country’s monthly natural gas came from the region.

“If those three states were its own country, it would be the number three natural gas producer in the world,” Greg Kozera, marketing director at petrochemical research nonprofit Shale Crescent USA and former president of the Virginia Oil & Gas Association, told Fortune

“Appalachia is the elephant in the room,” he said.

Appalachia has been among the fastest-growing natural gas production regions in the U.S. for a decade. But despite its importance, the region’s output began falling at the end of 2021, and has been relatively volatile since, according to U.S. Energy Information Administration data. Production dropped 2.2% between November and December 2021, and while output temporarily returned to earlier levels in February 2022, production in the region fell again by 2.4% in April.

“We’ve had a [production] slowdown since December of ’21,” Eugene Kim, director of natural gas research at Wood Mackenzie, a global energy consultancy group, told Fortune.

Kim says that extenuating factors, including bad weather last winter and frequent power outages, are partially responsible for the slowdown. But even accounting for these problems, producing enough gas to meet demand is becoming a huge challenge for the region because of infrastructure constraints. 

“Other factors that are limiting this growth, compared to years of the past in the Northeast— infrastructure development has been stymied,” Kim said. 

In recent years, a number of proposed pipelines in Appalachia have been scrapped due to more stringent regulations and opposition from environmental groups. These conditions have impacted several large projects in the area, including the canceled Atlantic Coast pipeline and delayed the Mountain Valley pipeline, and have caused a lower number of construction starts this year than usual.

“We used to see prior to the start of winter a lot of new takeaway capacity being initiated or started up, and that’s when you would see a big bump of Northeast production growth,” Kim said. “That has kind of halted with no new major projects this year.”

Global consequences

Reduced supply from the large Appalachian basin could not come at a worse time, as demand for U.S. gas continues to rise both domestically and internationally. 

In Europe, which relies on Russia for 40% of its natural gas supply, countries have been scouring the globe for replacements, and U.S. gas has been one of the only sources of relief.

The U.S. struck a deal in March to increase natural gas trade flows to Europe, prioritizing liquified natural gas (LNG), a frozen form of the gas that can be shipped and does not require pipelines.

But bringing gas from interior reserves such as Appalachia to the coast where it can be liquified and put on ships destined for global markets will require more pipelines. 

“What we have to do now is help places like Europe,” Kozera said. “What we’re going to need to do is build some more liquefaction facilities. And it’s probably going to take more pipeline capacity to get the gas from interior reserves to the coast.”

The same infrastructure problems afflicting Appalachia have so far spared other gas fields in the U.S., such as the large Permian Shale field in West Texas, where production may have to be expanded to meet rising demand. In March, the International Energy Agency forecasted that natural gas output in the Permian Basin would hit a record high in April.

But even in Texas, current infrastructure may not be enough to keep up with demand, as some analysts have warned that long-haul natural gas pipelines from the Permian Basin could reach maximum capacity as early as next year.

With production in Texas nearing capacity—and Appalachia already at near capacity—the country’s natural gas supply might soon be facing a bottleneck, at the worst possible time.

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.