Shale gas producers benefit from crude curtailments

Some natural gas producers in the US shale patch are benefiting from crude producers curtailing output, particularly in the Permian basin, which is responsible for more than half of the nation’s associated gas output.

The shrinking supply of associated gas has helped to slightly alleviate a glut of natural gas supply that producers were battling last year, and which stretched into 2020 as natural gas prices hit historic lows due to a warmer winter.

Following the earlier decline, companies planned for flat to declining production in 2020 and into early 2021.

"Less associated gas out of Permian is going to certainly be bullish for north-east producers," Wood Mackenzie analyst Alex Beeker told Upstream in an interview.

The north-east region of the US houses the Marcellus and Utica shale plays in the Appalachian basin, the largest natural gas producing basin in the nation.

The oil price collapse has resulted in oil drillers curtailing output, which a Rystad Energy analysis indicates may have the potential to exceed 2 million barrels per day.

Since the end of March, the Henry Hub natural gas spot price has rebounded off a 2020 low of $1.50 per per million British thermal units to levels seen earlier this year, reaching as high as $1.93 per million Btu earlier this month.

Those levels are still below the prices seen last year at more than $2 per million Btu, but have meant some reprieve for gas players while their crude counterparts continue to reduce new drilling and even halt dividends in some cases.

Production to drop through 2021

The US Energy Information Administration (EIA) in its May Short-Term Energy Outlook projected that natural gas prices will generally rise throughout the rest of the year as production is expected to decline. The nation reached a record high for dry natural gas production last year, averaging 92.2 billion cubic feet per day.

The EIA has forecast an average Henry Hub natural gas spot price of $2.14 per million Btu for 2020. In 2021, prices are predicted to rise to an annual average of $2.89 per million Btu largely because of lower natural gas production forecast for the year.

The EIA expects that the production average will drop to about 89.9 Bcfd in 2020 and fall further to an average of 84.9 Bcfd in 2021, although it anticipates output will rise in the second half of 2021 in response to higher prices.

The EIA forecasts production will decline the most in the Permian and the Appalachian regions, but for different reasons.

In the Permian, the production declines are expected to come from a fall in associated gas production, as producers scale back new drilling activity amid low crude prices due to the Covid-19 pandemic and the Opec+ price war.

Meanwhile in the Appalachia region, low near-term natural gas prices are discouraging any new drilling.

Cabot exercising caution

But even with the expected rise in prices, Dan Dinges, the chief executive of Appalachian basin producer Cabot Oil and Gas, said the company is comfortable in not growing production right away, at least not until prices are sustainable in the long term.

“You participate for a little bit better pricing for a short period of time, pricing rolls off and you still hadn't recaptured all your excess capital you put into it. That, again, has been played back over and over and over, and that's why there's such stress and distress in our market,” Dinges said in a first-quarter earnings call with shareholders on 1 May.

“We'd love to have the higher sustainable commodity strip. We'd love to grow into it. But we're cautious with our balance sheet and our capital exposure,” Dinges said.

Cabot fared well in the first quarter, posting a net income of $53.9 million despite a 49% decrease in realised prices relative to the prior year period. The company produced about 2.36 Bcfd in the first quarter and expects to spend $575 million as part of its capital programme. The company is currently operating two rigs and utilising two completion crews.

Companies not expected to add rigs soon

Wood Mackenzie‘s Beeker said that he has not seen natural gas producers lay down rigs the same way that crude producers have.

Natural gas rigs were around 94 in early March, and are now at 72, but the count in the north-east has been relatively flat, he said.

“We’d be very surprised to see companies talk about adding rigs and growing production,” Beeker said. “We think it’s still going to be capex cuts and flat to declining production.”

One Appalachia producer, Antero Resources, said it would drop three rigs and two frack crews in the second quarter, with plans to run only one rig and one crew for the rest of 2020. It lowered its budget to $750 million from a range of $1 billion to $1.5 billion. However, the company did not change its 3.5 Bcfd total production outlook for 2020.