US gas production rise making impact on gas markets-for now

Just how bearish should the US natural gas market be in light of rising domestic gas production?

The effects of a decline in US gas demand owing to high prices, fuel-switching, and a slowing economy have already been well-documented in this space.

But there is much greater uncertainty over the role of rising US natural gas production. Increased gas output has certainly been a factor, as record natural gas drilling activity has spawned a jump in wellhead production that has been estimated as high as 3-4% for the full year.

Lehman Bros, for one, suggests that the sharp rise in US gas production is beginning to have a significant impact on supply, perhaps partly offsetting the positive impact of recovering gas demand stemming from the price slump.

Lehman Bros. reckons that US production has risen by 1.7% during the past 6 months and that this rise will continue into the first half of next year. The analyst also estimates that Canadian production is up about 8% from a year ago. Coupled with the continuing storage overhang and weak demand, Lehman Bros. contends the market could be headed toward a prolonged period of weak natural gas prices.

Drilling slowdown

However, there are also signs that gas-related drilling activity may have peaked for now. Even though the blistering heat wave in the US Midwest and Northeast buoyed spot gas prices above the critical $3/Mcf threshold, there are indications that a longer-term improvement is on the horizon, according to UBS Warburg.

Warburg notes that the New York Mercantile Exchange's 12-month futures strip last week traded at $3.45/MMbtu, about flat on the week, and the September-March strip ranges from $3.05/MMbtu to $3.73/MMbtu.

It cites recent shrinkage in the US gas rig count, coming in response to the decline in prices. Last week, the US gas rig count fell by three units to 1,047, compared with the recent high on July 13 of 1,068. This development "could suggest that the market has peaked near-term.

Even if drilling activity levels had continued to climb, eventually they would have hit a wall regardless of the price of gas. Infrastructure, equipment, and personnel constraints likely would have capped the industry's ability to keep ramping up production past the short term.

Long-term strength

Indeed, another analyst sees a short-term misreading of the production outlook as pointing to an aspect of the ags industry that underpins a forecast of long-term price strength.

Raymond James & Associates assessed second quarter company-reported gas production results and thinks that provides a better understanding of what the natural gas industry is capable of achieving in terms of supply increases. For the moment, it seems as if the North American natural gas industry is capable of supplying 2.24 bcfd more gas than a year ago.

"Over the long term, if the industry is unable to increase yearly supply more than 2 bcfd, it is likely that a certain amount of gas demand will need to be removed from the market [to balance the market, i.e., 2000], thereby setting the stage for higher long-term gas prices," RJA said. "Given this, our original belief in long-term gas priecs of $35.0-$5.50/MMbtu remains very much intact."

RJA notes that, a year ago, the historical data indicated that about 600 gas rigs were necessary to maintain production: "In 2000, the gas rig count averaged 720, and the 3-month lagging gas rig count averaged 664, and production still declined, suggesting a minimum of 700 gas rigs are likely necessary to maintain production.

"Given the continued acceleration in rig activity in 2001, it's likely that the combination of increased rig inefficiency and degradation in drillable prospects will require 800-900 gas rigs just to maintain production."

Looking at the principal gas-producing regions of the US in 2000, the data show that only Texas, which logged a huge 51% increase in drilling activity, showed any kind of increase in gas production. A drop in Oklahoma gas production in 2000 was largely offset by an increase in Wyoming coalbed methane output.

While the deepwater Gulf of Mexico is a promising new area for increasing US gas production-accounting for 20% of total gulf output vs. just 5% 5 years ago-the increase in deepwater gas production last year was more than offset by a decline in gas production on the Gulf of Mexico shelf. Even while the gulf gas rig count reached a record high last year, gulf shelf production nevertheless dropped by 6.4%. Even though deepwater gulf gas output jumped by 18% last year, the overall gas production for the entire Gulf of Mexico fell by 2.6%.

Reckoning that US producers should be able to boost gas output by 1.5 bcfd this year, against the backdrop of a gas rig count of 1,000, state data indicate a continuing in rig efficiency and the inventory of drillable prospects, which necessitates a gas rig count of 800-900 to maintain gas production at current levels, RJA speculated. Taken together with the inability to boost gas volumes from the Gulf of Mexico shelf, contends RJA, it appears that these gas-supply trends are growing only more pronounced, making it "increasingly likely that, in the long term, demand rationalization at gas prices above $3.50/MMbtu will be required to balance the market."

OGJ Hotline Market Pulse
Latest Prices as of August 17, 2001

Click here to enlarge image

null

Click here to enlarge image

null

Nymex unleaded

Click here to enlarge image

null

Nymex heating oil

Click here to enlarge image

null

IPE Gas oil

Click here to enlarge image

null

Nymex natural gas

Click here to enlarge image

null

NOTE: Because of holidays, lack of data availability, or rescheduling of chart publication, prices shown may not always reflect the immediate preceding 5 days.

*Futures price, next month delivery. #Spot price.

Related Articles

Statoil reduces capital budget by $2 billion following 4Q losses

02/06/2015 Statoil ASA has reduced its organic capital expenditure to $18 billion in 2015 from $20 billion in 2014. The move comes on the heels of a fourth qu...

Oil-price collapse may aggravate producing nations’ other problems

02/05/2015 The recent global crude-oil price plunge could be aggravating underlying problems in Mexico, Colombia, and other Western Hemisphere producing natio...

Oil production begins at Nasr Phase-1 offshore Abu Dhabi

02/05/2015 The first phase of Nasr oil field offshore Abu Dhabi will be producing 22,000 b/d by yearend, according to United Arab Emirates news agency WAM.

Woodside lets FEED contract for Greater Western Flank project

02/05/2015 Woodside Petroleum Ltd. has let a contract to Wood Group Kenny for the front-end engineering and design for the flowline system and associated proc...

Deloitte studies oil supply growth for 2015-16

02/04/2015 A Deloitte MarketPoint analysis suggested large-field projects, each producing more than 25,000 b/d, could bring on 1.835 million b/d in oil supply...

BG’s 2015 budget ‘significantly lower than 2014’

02/03/2015 BG Group plans capital expenditures on a cash basis of $6-7 billion in 2015, a range it says is “significantly lower than 2014” due to “a lower oil...

BP trims capital budget by $4-6 billion

02/03/2015 BP PLC plans an organic capital expenditure of $20 billion in 2015, down from the previous guidance $24-26 billion. Total organic capital expenditu...

IHS sees second-half end of US output surge

02/03/2015

Expectations are moderating about growth of oil production in the US this year.

Gazprom Neft starts shale oil production in western Siberian field

02/03/2015 JSC Gazprom Neft reported start of shale oil production from the Bazhenov formation during tests of two wells in southern Priobskoye field in centr...
White Papers

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...
Available Webcasts


Prevention, Detection and Mitigation of pipeline leaks in the modern world

When Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 

register:WEBCAST



On Demand

Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


The Future of US Refining

Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected