WILL AN OVER SUPPLY OF U.S. NATURAL GAS IMPACT HAYNESVILLE SHALE LEASE OFFERS? - Fool.com
Where Are the Natural Gas Declines?
http://www.fool.com/investing/general/2010/02/02/where-are-the-natu...
Toby Shute
February 2, 2010
Waiting for production declines in the natural gas market is getting to be like Waiting for Godot (or Guffman, if you prefer). Last week just brought more of the same.
At the end of each month, the U.S. Energy Information Administration (EIA) reports monthly natural gas production figures. This so-called 914 data, referring to the form that operators like Anadarko Petroleum (NYSE: APC) and Ultra Petroleum (NYSE: UPL) file with the government, is prone to revision, and is released on a two-month lag. That said, it's still one of the best tools for investors trying to keep tabs on the gas market.
According to the November data, lower 48 gross production came in at an estimated 63.13 billion cubic feet (Bcf) per day. That's roughly flat from the prior month, and more than 1% higher than the prior-year figure. As we've discussed before, production peaked in February 2009. The November average represents a decline of only around half a Bcf per day (or less than 1%) compared to that peak rate.
These results totally defy prior expectations.
Supply models could use some tinkering
On its August 2009 conference call, Chesapeake Energy (NYSE: CHK) was talking about a 2.5 to 3 Bcf/day year-on-year decline by the end of the year. EOG Resources (NYSE: EOG) called for an even steeper decline in 2009, initially calling for a 4.8 Bcf/day decline, and then dialing that down to 3.2 Bcf/day on its November call.
While these companies sometimes rag on the 914 data, and like to talk about how awesome their in-house production models are, the plain fact is that they totally whiffed on 2009 decline rates.
Completely anticlimactic
The broad themes of why production has held up in the face of a collapsed rig count are well recognized: horizontal drilling by shale players like Petrohawk Energy and Southwestern Energy (NYSE: SWN) has made up for heavy declines on the conventional side, and operators have also gotten a lot more efficient. We discussed these themes when I said to forget the rig count back in November. Another consideration is the industry backlog of
drilled but uncompleted wells, and on this point, I think there is much
less clarity.
You often hear E&P companies talk about "drill and complete" costs. Completion involves everything from setting production casing to fracturing the formation to hooking the well up to a sales line. This represents a significant portion of the total cost to drill and complete a well.
Lots of companies had to drill furiously in 2009 to meet various obligations, but given their stretched balance sheets and low gas prices, they had a big incentive to defer completions. This factor, plus pipeline constraints, has spread very large production increases in new shale plays like the Haynesville and the Marcellus over a longer period of time.
So are the declines ever coming?
On its third-quarter call, Chesapeake said that its completion backlog was cleared out, and it suspected as much for the industry at large. XTO Energy (NYSE: XTO), soon to become part of the ExxonMobil (NYSE: XOM) empire, echoed these sentiments on its own results call. Meanwhile, the folks at Casey Research estimate that there are thousands more uncompleted wells out there, representing several Bcf per day of production.
I would normally give the big independents the benefit of the doubt, given their unparalleled view into the market, but we've seen what good that vantage point did them in predicting declines in 2009. If XTO is right, we will see production finally drop around the end of the first quarter. Rather than hold my breath, I'm going to stay focused on E&Ps that can thrive in a $4 to $6 per million BTU gas environment.
Views: 29
Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on
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2010 should see a significant increase in HS drilling activity as more leases near term expiration. The need to HBP leasehold will be equally strong in 2011. As the development commences in other shale plays, the pattern will be repeated. There will be several years of energy companies building leasehold followed by drilling to hold those leases. The list of shale plays grows longer each year. Though the Barnett is winding down, it will produce gas for decades to come. The Woodford, Fayetteville, Eagle Ford, Bakken, Marcellus are all in various stages of development. Shale gas wells exhibit high initial production rates. And that production causes transportation challenges which lead to choked back and shut in wells. Depressed prices, over supply and the capital demands of developing other shale plays will have an impact on the HS Play. It has been gratifying to see a modest rebound in lease offers. Will those offers continue to improve or will they plateau or decline based on the demands of nationwide shale gas development?
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Permalink Reply by ken hatcher on -
Imo the energy bill coming later this year will determine the destiny of the shale plays as far as being really viable.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Even with incentives from aggressive national energy policy (if that develops), there is little chance that the benefits will mitigate the over supply in the short term. It will take years before the increased demand catches up with the over supply. And the wrong national energy policy can make a bad situation worse.
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Permalink Reply by ken hatcher on
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I would hope these larger independents are banking on something. I think leases are close to being stablized.
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Permalink Reply by Mattie on
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Skip,
My prediction is already coming true - Barry Obama has EVERY reason to support NG as the bridge fuel to a greener environment. But, in addition to dropping virtually every incentive for O&G exploration in his recent budget proposal, I also predict that he will demand some type of trade-off with the O&G industry in exchange for federal funding/support of billions of dollars in infrastructure required for blanket conversion to NG vehicles nationwide. This will likely be in the form of "price caps" coupled with a "cap & trade" tax (minimal compared to oil or coal), plus more rigid penalties for other environmental issues, higher federal land royalties, and higher permitting and P&A costs. Overall, the cost of doing business will go up while the ceiling will be set for upside economics - all of this in exchange for a substantial increase in domestic demand. Obama's "deaf ears" are awaiting the O&G lobbyists to put on their "kneepads" and beg for federal support of this valuable commodity. It won't be cheap for any of us - this liberal, spend-happy government needs money, and they will figure out how to get it. If this happens, IMO the trade-off will result in a $7.50/mcf average price for NG which, if we don't get the big cost-jump on the services side of the business, will allow the industry to survive, if not thrive. Future inflation rates will determine how long that remains a viable price-point for our industry, though. You and I both lived thru the Carter years with price controls and double-digit interest rates and inflation - if that happens again, it won't matter. We'll all be up s*** creek without a paddle. Just my opinion.
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Otherwise, I am in agreement with you, Skip. We will not see the big declines that CHK or others are predicting - there will be too much "gold rush" lease protection going on for the next 2-3 years to keep deliverabilities high in these shale plays - the economy cannot grow quickly enough without "new demand" in the form of a heavily favored NG policy as a bridge fuel. Absent that, I see a huge "gas glut", and there may be quite a few companies in trouble. The only thing keeping most of these companies alive over the past year or so is their "cash banks" (if they had any), and taking advantage of the "forward curve" on the NYMEX. Anyone with any sanity should have hedged at least 50% of their volumes before the price collapse back in 2008 thru at least 2010-2011 at a $7.50+ price deck - if they didn't hedge, they are on their heels. Just ask Conoco Phillips how that "no hedge" strategy worked for them. They are now out peddling up to $10B in existing assets so that they can "grow organically"??
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Permalink Reply by Skip Peel - Mineral Consultant on
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Mattie.
Though national energy policy is yet to be determined, by the Congress not the President, in my equation is doesn't make that much difference. What's at work here is market forces. Supply and Demand. And even an aggressive approach to provide incentives for a wider use of natural gas will have no substantive impact on demand in the short term. And neither party has the political will power to abandon coal for natural gas.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Major natural gas independents talk about curtailing production to reassure investors and the public but they know they can't and won't. They have to keep drilling. They have become addicted to shale gas. Once down that road, it's hard to go any other direction. It's Aubrey MCClendon's analogy of "The Shale Haves and The Have Nots" coming true.
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Skip,
I am agreeing with you that the chances of a continuing supply glut are real due to some of the factors you've mentioned - mainly poor industrial demand, plus no slowdown in sight for shale players hoping to HBP acreage (i.e. to some degree, betting on the come). My point is that ONLY a huge legislative switch to NG as a preferred fuel will turn the tide - it may not immediately increase demand since infrastructure build-out for CNG autos, plus more gas-fired power generation will take time - but, phsycologically, it will do wonders for the futures market and the savvy producers will be able to hedge forward at prices that will keep them in business.
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Permalink Reply by Les Bamburg on
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Mattie, there is already sufficient gas fired generation in the US to make a big difference. Did you realize there is more gas fired generation capacity than coal fired generation capacity in the US - it just doesn't all run.
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Permalink Reply by sesport on
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Les - Do you have any idea of how much of the CHP (cogen) market is fired by ng? I'm reading of more incentives to use CHP and am thinking it is an indirect support for ng production even if it's (ng) not specifically mentioned in budgets & bills. I've read that the PPG plant and CEC, both in LA, are using this kind of power generation.
I'll have one of those if it means I don't have to ride a bike on my patio to toast my bread. lol
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Permalink Reply by Les Bamburg on
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Sesport, as far as I know all Combined Cycle Power is natural gas fueled.
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