By Paul Ausick August 23, 2015 8:44 am EDT 247wallst.com

In mid-August of 2008, the national average next-day price for natural gas was $7.52 per million BTUs. A year later the price had fallen to $3.12 per million BTUs and on August 18, 2015, the price had dropped to $2.67 per million BTUs. Natural gas production in 2009 averaged 58.7 billion cubic feet per day; this year the average is 72.2 billion cubic feet per day.

With more than two months to go in the 2015 storage injection season, the U.S. Energy Information Administration (EIA) estimates that natural gas in storage at the end of October will total 3.867 trillion cubic feet, the second-highest October level ever.

The EIA also estimates that natural gas consumption in 2015 will rise from 73.5 billion cubic feet per day to 76.5 billion cubic feet, driven by the power generation sector where fuel-switching from coal to natural gas continues. Industrial consumption is expected to increase by 2.3% in 2015 and 5% in 2016 as new fertilizer and chemical plants come online. Only in the residential and commercial sectors is consumption expected to decline both this year and next.

Supply growth already exceeds demand growth, keeping prices down. Of the top 10 natural gas producers in the first quarter of this year, only one cut production. Southwestern Energy Co. (NYSE: SWN) raised production by 411 million cubic feet per day and Cabot Oil & Gas Corp. (NYSE: COG raised production by 511 million cubic feet per day according to a list prepared by the Natural Gas Supply Association. Only Exxon Mobil Corp. (NYSE: XOM) cut production. How can natural gas producers make a profit at these low prices and high production rates?

The basic answer is producers take advantage of advances in drilling and fracking technology, and they drill for gas in the places they believe have the most potential for producing the highest volumes. Right now, the most productive plays are the Marcellus and Utica shales.

The Marcellus and Utica regions account for about 85% of the growth in U.S. natural gas production since the beginning of 2012. A recent well drilled in southwestern Pennsylvania posted an initial 24-hour production rate of a staggering 72.9 million cubic feet per day, equal to 22.6 million cubic feet per day per every 1,000 feet of lateral drilling. Wells such as this, and others that are nearly as productive, could generate break-even at near $2 per million BTUs. (A million BTUs is roughly equivalent to 1,000 cubic feet of natural gas.)

Analysts at Platts offer a some reasons for the continued natural gas production increases:

  • Leasing contracts require the companies to produce or face a fine or, worse, the loss of the lease.
  • Committed space on a pipeline moving gas from the field to a user. Most arrangements with pipeline companies require lessees to pay for the space on the pipeline whether the lessee fills it or not.
  • Producers are lining up to take advantage of liquefied natural gas exports which are set to begin late this year.
  • Eventually lower rig counts will result in lower production and higher prices. Like good Boy Scouts, producers want to be prepared.
  • Any cash flow, no matter how small, is better than no cash flow.

The analysts had a few more suggestions, but you get the general idea. The situation reminds us of Samuel Johnson’s comment on second marriages: they represent the triumph of hope over experience. In addition to hope, however, natural gas producers are also used to the cyclical nature of the commodity market. But the question remains: is it really different this time?

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I think that the article is using wrong supply/demand numbers.  If supply is 72.2 per day and demand is 76.5 per day that means we have 4.3 deficit per day and I don't think that is happening, especially when it then goes on to say we are going to have the 2nd highest storage on record this fall.

Could be but it does a good job of explaining why low prices have not translated to a decrease in production.although it omits the fact that well designs have made significant improvements in the percentage of hydrocarbons recoverable.  And it correctly points out that the Marcellus and the Utica are producing prodigious quantities of gas at surprisingly low costs per mcf.  That production will have an inhibiting effect on price increases associated with increased future demand in whatever markets it penetrates.

Pipeline projects in Appalachia 2010 - 2013: $8B

Pipeline projects in Appalachia 2015-2018: $35B

Cracker plants, electrical plants converting from coal to gas (ongoing), LNG, industrial plants, fleet vehicles.  There is much demand coming online over the next decade, albeit, for that period of time, new supply will meet new demand, but there will be a point in the future, when supply does not keep up.  Then, prices will move higher. 

Canada is paying high $3s (USD) / mcf.  We need more pipeline heading north as well.  

Before this discussion rotates off the Main Page I thought I would highlight the portion that I thought would generate some replies.  It is an amazing well.

"A recent well drilled in southwestern Pennsylvania posted an initial 24-hour production rate of a staggering 72.9 million cubic feet per day, equal to 22.6 million cubic feet per day per every 1,000 feet of lateral drilling. Wells such as this, and others that are nearly as productive, could generate break-even at near $2 per million BTUs. (A million BTUs is roughly equivalent to 1,000 cubic feet of natural gas.)"

The difference is made up by Canadian imports, and believe it or not, we still bring in a trickle of LNG. It would be far better to use a "Total Supply" figure than "Daily Production" figure. Canada still produces a chunk more than they consume, sending it across the border. The market is indeed oversupplied and is doing its' job of pricing in demand and trying to curtail drilling, although efficiency gains and targeting sweet spots isn't doing anybody any good. Why drill and sell off your absolute best holdings into a horrible pricing regime? One day, the E&P's will start to act like adults, or default/chap 11........

I think the reasons for continuing to drill in a depressed price environment depends on the company.  Some wish to maintain a level of operations that allows them to avoid laying off their talented core employees.  They know they will be hard to replace when prices improve in the future.  Some companies have painted themselves in a corner with heavy debt requirements.  They have to maintain cash flow to service debt hoping to hold out until prices improve.

I find it somewhat surprising that there is little written and reported about how the industry is responsible for creating the current environment that has placed so many companies at peril.   In a industry that prides itself on assessing and managing risk, a majority of upper level managers accepted the perceived new paradigm of the Shale Haves and the Shale Have Nots.  The conviction that unconventional resources (not just shale) were the future of the industry drove decisions to implement very aggressive land acquisitions and the drilling programs required to hold all that land for many decades of lucrative and reliable reserves.  The financial industry made it easy for those companies to run up huge debt loads all the while their operations were creating a growing and obvious supply glut.  Now that depressed prices have forced companies to concentrate on operational efficiencies it makes obvious just how inefficient were the vast number of early wells drilled to hold leases. 

After the very aggressive land acquisitions it is now obvious that the actual size of these shale plays that are economical at rational prices are much smaller than originally published.  Remember GMXR with Harrison county and Goodrich with Panola county and how that area was included in the Haynesville Shale maps.  The original Eagle Ford shrank alot when the dry gas portion become uneconomical and if oil prices stay in the $50 range for a few years large sections of the oil window of the Eagle Ford will also disappear off the maps.

The fact that unconventional resource plays often cover relatively large continuous areas provided room for multiple companies to race to get a piece of that rock even in the numerous cases where there was little or no reliable well control.  That was a high risk competition that ended up with a handful of winners.  Those late to the race paid the highest prices - for acreage and often for borrowed capital.

Almost ALL of the nat gas in New England comes from Canada.

A decade in, there is still no direct pipelines from NE PA to New England, how is that for politicians doing there jobs?!?

Scary bad.

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