Picking Up Positions In NatGas
http://oilprice.com/Energy/Natural-Gas/Why-Now-Is-The-Time-For-Inve...
As the price of natural gas continues to hover around its lows for the year, it looks like the economic principles of supply and demand are starting to take effect in the market.
The U.S. EIA recently found that production from seven major shale basins in the U.S. should start to drop quickly after reaching an all-time production high in May. The seven basins produced a total of 45.6 billion cubic feet per day of gas in May, but that figure should drop 1.5 percent by September. Of the seven basins, only Utica will post an increase in production.
The drop in supply is largely a result of slow depletion from legacy wells combined with a decline in new wells being drilled. With natural gas prices and oil prices still at very low levels even after the small rebound last week, producers simply do not have much of an incentive to drill new wells. The volatility around energy prices is also playing a role, as it makes it harder for companies to plan and properly hedge production.
This is good news for the markets though. To the extent that demand growth is weak, and there has been a glut of gas recently, the EIA data suggests that the markets are starting to sort themselves out. As production falls, prices should rise a bit until producers can make a profit by drilling new wells.
Despite the prospect of falling production, natural gas prices and stocks have yet to really respond. Even the EIA is starting to revise its price expectations upward. Of course no one is expecting natural gas prices to come back to $4 per million Btu (MMBtu) anytime soon, but for stock market investors, the price trend is starting to head in the right direction. If producers continue to throttle back on production, stock prices should start to see appreciable gains before the end of the year from current levels.
Both short-term and medium-term, natural gas producers are probably in a better place than oil producers. On the one hand, demand is a mixed bag. It is not rising quite as much as once predicted, but with more power plants switching from coal to gas, consumption will continue to pick up. With energy demand more or less stagnant or at best slowly growing in the U.S., natural gas demand increases need to come primarily from taking share from other existing fuel sources. The EPA’s greenhouse gas rules will continue to force coal to shrink, to the benefit of natural gas. More natural gas consumption will push up prices.
Also, LNG export facilities will begin to come online – Cheniere Energy expects to bring the first major American LNG export facility online by the end of this year. More exports should provide a demand pull for natural gas drillers.
Meanwhile, the contraction on the supply side should help the producers that are the fittest and best positioned. As fewer wells are drilled and the highest cost production is forced out, prices will inevitably rise. Investors should position themselves now to take advantage of future production declines and the resulting price increases.
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Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on -
Another article about falling production that doesn't mention the fracklog. Makes you wonder whether the omission is caused by lack of knowledge on the part of the author or a desire to overlook that elephant in the room in order to give the idea that nat gas prices will rise in the near future.
As to the author's assertion that, "With natural gas prices and oil prices still at very low levels even after the small rebound last week, producers simply do not have much of an incentive to drill new wells.", well the incentives are obvious - maintain cash flow to support operations and service debt.
As to the fracklog, I see no reports or estimates of the number of Waiting On Completion (WOC) wells across all major basins. I do know that as of Aug. 28, 2015 there were 156 WOC wells in the Louisiana portion of the Haynesville Shale Basin.
http://dnr.louisiana.gov/assets/OC/haynesville_shale/haynesville_mo...
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Permalink Reply by Skip Peel - Mineral Consultant on
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The North Dakota Department of Mineral Resources may accept more applications for temporary idling of wells with approval on a case-by-case basis, Director Lynn Helms said Monday. In July, the number of uncompleted wells in the state, most of which have a one-year window, reached 914, up by 70, he said. "It's just going to be a whole lot better for everyone if we store the oil in the shale formation instead of in Cushing, Oklahoma," Helms said. Reuters (9/14)
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Permalink Reply by Keith Mauck (Site Publisher) on
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What does the uncompleted number look like in the Eagle Ford?
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Permalink Reply by Skip Peel - Mineral Consultant on
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Hard to find a comprehensive number for the entire basin. I suspect it is quite high. Over 900 in the Eagleville Field is the only hard number I have seen.
Originally, there were 30 plus fields, however, due to field consolidations, the number of fields has been reduced to currently 22 active fields (with 17 inactive) located within the Railroad Commission Districts 1 thru 5 and the fields cover 26 counties. The wells in the deeper part of the play deliver a dry gas, but moving northeastward out of District 1 and updip, the wells produce more liquids. One of the fields discovered in District 2 is actually an oil field (Eagleville (Eagle Ford)). - TRRC
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Permalink Reply by Steve P on
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is there some way to identify those 156 wells by S-T-R other than a section by section search of Sonris?
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Permalink Reply by Skip Peel - Mineral Consultant on
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Not that I am aware of.
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Permalink Reply by Jesse Joyner on
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Skip, in the Haynesville Shale in Bossier & Caddo Parishes, do you have any data in regards to the operators that are putting their fracks on hold vs. the operators that have a track record of proceeding to IP production on wells that are presently being drilled?
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Permalink Reply by Skip Peel - Mineral Consultant on
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The state does not aggregate that data. I haven't performed a search of those parishes to determine which companies are delaying completions. The weekly rig report allows close to real time tracking of drilling but there is no similar report that tracks frack operations. The state's Haynesville Shale graph linked above is the only source I have for that data.
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Permalink Reply by Skip Peel - Mineral Consultant on
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The Bakken and Eagle Ford produce "associated gas" from the oil window. We really should be looking at the more gassy plays, the Marcellus and the Utica. Here's the number of wells WOC in Ohio and Pennsylvania. No numbers for West Virginia. Add in the Haynesville and the big three, though far from the only gas plays, have a fraclog of about 2500 wells. The complete article, Don't Expect Higher Natural Gas Prices Soon (link below) is quite comprehensive.
"......the Ohio Department of Natural Resources last reported an inventory of 596 wells, while the Pennsylvania Department of Environmental Protection reported 1,716 wells waiting to produce. Specifically, Chesapeake Energy reports 275 MMcf/d of production they currently have curtailed and awaiting completion.
Bentek Energy estimates that this total backlog represents up to 14 Bcf/d of gas production sitting in reserve. This is a major reason why the EIA expected U.S. natural gas supply to keep growing even through 2016, even with imports falling to nearly nothing."
Read more: http://www.nasdaq.com/article/dont-expect-higher-natural-gas-prices...
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