Stalled recovery in SCOOP/STACK gas production to tighten Midcontinent supply levels, lift prices

Stalled recovery in SCOOP/STACK gas production to tighten Midcontinent supply levels, lift prices


Output remains 10%, or 400 MMcf/d, below Q1 levels

NGPL Midcon Q1 2021 curve climbs 41 cents since mid-July

Permian poses additional supply risk for Midcontinent in 2021

Denver — Continued production weakness in Oklahoma's SCOOP/STACK basin could push US Midcontinent natural gas prices sharply higher this winter as regional markets struggle to keep pace with demand.

So far in September, SCOOP/STACK gas production has averaged about 3.6 Bcf/d. While output has rebounded more than 12% from summer lows recently, it has also struggled to return to levels above 4 Bcf/d seen in the first quarter of the year, data compiled by S&P Global Platts Analytics showed.

Following the rout in WTI crude prices earlier in 2020, Oklahoma's once-coveted shale basins have recently fallen out of favor with many producers. Over the past six months, the number of active drilling rigs in the SCOOP-STACK has fallen to just 10, compared with more than 40 rigs as recently as March.

After briefly dipping into negative territory in March and April, half-cycle, post-tax internal rates of return in both sub-basins have remained around 6% to 7% in recent months, less than half the estimated return in the Permian Basin and significantly below current IRR estimates in other associated gas plays like the Bakken Shale, the Eagle Ford Shale and the Denver-Julesburg Basin, Platts Analytics data showed.

Prices, supply

In early April, cash prices at the NGPL Midcontinent hub briefly dipped below $1/MMBtu before rebounding this summer amid a tightening regional supply situation.

As gas production in the SCOOP/STACK continues to sputter, spot prices at the regional benchmark hub have recently strengthened above $2.30 and are currently averaging about $1.90/MMBtu in September, S&P Global Platts data shows.

For the fourth quarter, current Platts Analytics forecasts show total Midcontinent gas production hovering around 6.1 Bcf/d – about 1.9 Bcf/d, or nearly 24%, lower than a year ago. Although winter season heating and power demand in the Midcontinent are expected to decline this year, along with net outflows to neighboring markets, the region is still likely to face greater supply tightness this winter compared with last.

Forwards markets already appear to be pricing such a scenario.

On Sept. 15, first-quarter 2021 gas prices at NGPL Midcontinent settled at an average $2.97/MMBtu, up more than 40 cents from their mid-July level, Platts' most recently published M2MS data showed. 

Permian risk

Heading into the winter months, the Midcontinent gas market could face additional risks when it comes to imports from the Permian Basin, where lower production and higher prices have recently made central US hubs like NGPL less attractive for West Texas supplies.

From December through February, NGPL Midcontinent is currently priced at just an 11 cent premium to Waha; in the second quarter of 2021, that premium shrinks to just 7 cents. From July through December 2021, forward markets are now pricing NGPL at an average 6 cent/MMBtu discount to West Texas gas.

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