Low Natural Gas Prices, Elevated D&C Costs Forecast to Cool Lower 48 Activity

By Carolyn Davis  March 24, 2023 naturalgasintel.com

The decline in U.S. natural gas prices, combined with elevated costs to drill a well, are forecast to slow down drilling and completions (D&C) activity in the gassy basins of the Lower 48.

Rystad Energy Vice President Serik Omarov in a note said the gas price decline has created uncertainty for exploration and production (E&P) companies, particularly those developing gas reserves. Oilfield service costs for D&Cs have risen by around 30% since 2021.

“With the price plunge, the economics will not be attractive for operators to allocate capital even for top quartile basins,” Omarov said.

Several natural gas basin operators already have said they are reducing activity. Among them are Haynesville Shale-focused Comstock Resources Inc. CEO Jay Allison last month discussed the pullback during the 4Q2022 earnings call, noting the sharp reduction in gas prices.

“In 2023, we will continue to derisk and delineate our western Haynesville play with a two-rig program in 2023 and we are managing our drilling activity to levels to prudently respond to the lower gas price environment we’ve had so far this year,” Allison said. “We’re in the process of releasing two of our operated rigs on our legacy Haynesville footprint to pull down our activity and respond to lower natural gas prices…” 

Also dropping rigs is gas-weighted Southwestern Energy Co., which works in the Haynesville and Marcellus shales. In addition, EQT Corp., the nation’s largest gas producer, is pulling back the reins. Chesapeake Energy Corp., another natural gas heavyweight, is droppi...

“Since the beginning of the year, the rig count in gas basins have dropped by 5%, and we project further losses in the coming months,” Omarov wrote. 

OFS prices may have peaked in December, but there are “prospects of further softness in 2023. That’s on the back of the slowdown in activity and the decrease in demand for drilling services, along with improvements in supply chain bottlenecks that were created in part by the unprecedented disruption caused by the Covid-19 pandemic.”

OFS prices should remain elevated because of the “robust demand from liquids-rich basins,” according to Rystad. “Service providers can and will reallocate some rigs and equipment from gas to liquid-rich basins, which will, in turn, improve supply and soften prices in liquids-rich basins.”

Last year, Lower 48 well-related capital expenditures (capex) surged by more than 40%, Rystad estimated. The increase was “fueled by soaring inflation, supply chain constraints and a rebound in activities.”

Today, drilling contractors are noting  “an unprecedented level of utilization, leading to an over 80% increase in rig rates,” the analyst team estimated. 

NOV Inc. CEO Clay Williams, during the company’s 4Q2022 conference call, said onshore E&P in the Lower 48 had amid multiple constraints. Among other things, he cited a shortage of employees.

Rystad’s Omarov said NOV was not the only company facing labor issues.

“Labor was a key critical pain point for oil and gas companies, particularly because many struggled to find experienced blue-collar workers,” he said. 

In addition, Omarov cited shortages of oil country tubular goods, aka OCTG, which refers to piping products such as casing and tubing. “Existing inventories have dried out, and supply from mills remained tight through 2022, causing prices to jump by over 100% for certain sizes and grades of casing.” 

There also have been higher fuel prices, particularly for diesel, which contributed to inflation direction because of increasing logistics costs last year.

“While we expect capex to increase further in 2023, it will not be as big of an increase recorded in 2022,” according to Omarov. “We expect both activity levels and inflation to slow down this year.” 

Rystad is projecting domestic capex “will grow by an additional 11% in 2023.” Other energy analysts also expect to see higher E&P capex in 2023, but not as big of a jump as last year.

“A global economic slowdown may further impact prices and activity,” Omarov said. He cited the “recent rapid decline” in West Texas Intermediate oil futures. “This may impact D&C activity and investments in some liquid-rich basins as well.”

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