US gas play developments
US GAS PRICES MUST REFLECT THE COST OF PRODUCTION
PER MAGNUS NYSVEEN AND LESLIE WEI, RYSTAD ENERGY
THE OIL PRICE DROP has dominated industry attention in 2015 as operators focus on the most profitable areas and benefit from the low service costs. During the same period, gas prices have dropped to similar levels, going from an average of $4.4/kcf in 2014 to $2.8/kcf in July 2015. This article highlights the reaction in the gas plays and examines possible developments in the gas price going forward.
Historically the largest source of gas production in the US came from decreasing conventional fields. In 2008, the picture changed as shale wells became the primary source of gas additions and surpassed conventional production in 2011. The gas production from shale fields comes from dry gas fields and the associated gas recovered from oil and liquid-rich fields. Figure 1 shows the monthly historical and forecasted US gas production split by source of production, where other sources include conventional, coalbed methane, and tight gas plays. Barnett, Haynesville, and Marcellus are the main shale gas plays, and most of the associated gas comes from the Eagle Ford. Drilling activity peaked in 2008 when gas prices surpassed $10/kcf. The success from these wells resulted in an oversupply of gas and a drop in the gas price to approximately $5/kcf by 2010. The initial response to the lower price was a decrease in gas rig count from over 500 in December 2008, to approximately 300 in June 2009. Rig count increased during the second half of the year as operators shifted focus to the Marcellus.
Operators have once again lowered the rig count because of the recent gas price decline. Dry gas rigs dropped from 264 in November 2014 to 160 as of July 2015. Most of the decline took place immediately, and the overall behavior has been flat since early May. As the result of lower activity, dry gas production also started to decline in 2015. Since shale has been the primary source of additions, this implies that the total US gas production could fall for the first time since 2005.
Shale gas companies are still focusing on the Marcellus play and benefiting from high grading and lower unit costs. Figure 2 shows the wellhead breakeven gas price for the key gas plays. Most of the activity is in the Marcellus, where the breakeven prices are further broken down by play area. The breakeven prices are weighted based on the 2015 and 2016 expected production for each asset, the reported 2015 well cost, and an assumed opex of $1/kcf. Considering the current price environment, companies can still turn a marginal profit in the best areas of each play, however, as shown in Figure 1, the production will continue to decline at current gas prices.
To determine the gas price needed to sustain production levels, Figure 3 shows the gas supply curve in the US based on the 2015 remaining resources and breakeven gas price. The width of the box represents the remaining gas resources for each source of production, and the height represents the 75% confidence interval for each category. The cost curve with over 10,000 individual fields is also shown. The lowest breakeven prices come from shale oil plays, where the liquid content helps drive the revenue. The Marcellus is the largest resource base for gas production, with an average breakeven price of $3.1/kcf for the remaining resources. According to this chart, most of the resources are profitable under $4/kcf.
The gas price environment of below $3/kcf resulted in a decline in shale gas production indicating that current price levels are not sustainable. However, only a small increase in the price is required to increase production levels since most of the remaining resources have breakeven prices less than $4/kcf.
ABOUT THE AUTHORS
Per Magnus Nysveen is senior partner and head of analysis for Rystad Energy. He joined the company in 2004. He is responsible for valuation analysis of unconventional activities and is in charge of North American shale analysis. Nysveen has developed comprehensive models for production profile estimations and financial modeling for oil and gas fields. He has 20 years of experience within risk management and financial analysis, primarily from DNV. He holds an MSc degree from the Norwegian University of Science and Technology and an MBA from INSEAD in France.
Leslie Wei is an analyst at Rystad Energy. Her main responsibility is analysis of unconventional activities in North America. She holds an MA in economics from the UC Santa Barbara and a BA in economics from the Pennsylvania State University.