Ask the Expert: Dr. David Hoaas

How are safety concerns and natural gas prices affecting gas production and the regional economy around the Haynesville Shale in Louisiana and Texas?

The financial impact of the Haynesville Shale Gas discovery has had a tremendous impact on Northwest Louisiana and East Texas over the last five years. An influx of money came into this region as payments of lease fees to property owners for mineral rights; as expenditures to drill wells; and as paid royalties. At the height of the boom in this part of the country, natural gas was selling at more than three times its current level. A sluggish world economy, multiple mild winters, and the discovery of natural gas shale formations in others parts of the United States and the world are now driving the reduction in price. As always in the market place, the forces of supply and demand determine prices.

Given the current price of natural gas it is no longer profitable for gas companies to expand production. The money spent for lease payments and drilling expenditures has not left our economy; it just no longer continues to increase. Wells that have been drilled continue to produce and royalty payments to land owners continue, but at a reduced rate given the lower price.

In addition, two concerns for safety have reduced the amount of new natural gas exploration and drilling. First, we live in a part of the country where for a number of months each year hurricanes threaten drilling and extraction equipment. Out of a concern for safety, particularly for the men and women operating drilling rigs, drilling and production may be shut down for a period of time thus delaying the extraction and sale of natural gas that leads to royalty payments. Second, many individuals are concerned about the environmental impact of the fracking process. Drilling companies have been increasingly asked to take additional steps to ensure that the surrounding environment, particularly the water shed, is not affected by deep underground drilling. These necessary precautions slow the expansion of further natural gas exploration and production.

Natural gas will continue to be an important part of the economies of Northwest Louisiana and East Texas. Its importance, however, will be smaller than people had hoped from 2008-2010.

Dr. David Hoaas is Professor of Economics at Centenary.