The U.S. Natural Gas Boom Is On Its Last Legs

Authored by Tsvetana Paraskova via OilPrice.com,

Weak natural gas prices amid abundant supply and a falling rig count across the United States will slow down U.S. natural gas production growth this year, and some basins will even see production declines, analysts say.

Due to the shale revolution, natural gas production in the U.S. has been growing rapidly over the past decade, and growth accelerated over the past two years. But now companies are struggling with negative cash flows as prices stay low, and investors are not rewarding production growth if they don’t have returns.

The natural gas glut created from the continuously rising production amid insufficient pipeline takeaway capacity has been recently aggravated by the gushing associated gas in the oil wells in the Permian, where pipeline capacity is not nearly enough to accommodate additional natural gas volumes. Gas flaring has hit record highs as producers are unable to find any useful and reasonably cost-efficient application for that gas.

Due to continuously rising U.S. natural gas production, natural gas prices at the U.S. benchmark Henry Hub averaged US$2.57 per million British thermal units (MMBtu) in 2019—the lowest annual average price since 2016.

Lower prices and fewer rigs are expected to slow down U.S. natural gas production growth this year. Some regions in the Mid Continent could see declines in their gas production, according to estimates from S&P Global Platts Analytics.

For example, the SCOOP/STACK play in Oklahoma saw its active rig count drop to a multi-year low of 23 this week, according to data from energy data analytics company Enverus cited by Platts.

Despite the tumbling rig count, natural gas production in the SCOOP/STACK has been steady at around 3.3 billion cubic feet per day (Bcf/d)-3.4 Bcf/d for most of last year, S&P Global Platts Analytics says.

This year, gas production in the SCOOP/STACK is set to slow down to 3.2 Bcf/d, down from the 3.4 Bcf/d average production in 2019, according to S&P Global Platts Analytics. In the broader Midcon Producing region—including the SCOOP/STACK, Cleveland Tonkawa, Mississippi Lime, and Granite Wash plays—production in 2020 is set to average 6.6 Bcf/d, down from 6.8 Bcf/d in 2019, according to Platts Analytics’ forecasts based on the current rig count in the areas.

U.S. dry gas production rose by 8-9 Bcf/d in each of 2018 and 2019, but this year the production increase is set to be just 2 Bcf/d, Enverus said in a report last month.

In 2019, the Marcellus and Utica basins saw pipeline relief but “aggressive gains in production continued to surprise and caused renewed price weakness this past fall,” Enverus said. In the Permian, promising economics will continue to be challenged by pipeline capacity shortages, while Haynesville’s growth last year was likely limited to Tier 1 acreage, “which is the only area reliably in the money with a $2.13/MMBtu gas breakeven,” according to Enverus.

The EIA’s latest estimates in the January Short-Term Energy Outlook (STEO) show that U.S. dry natural gas production is set to rise by 2.9 percent annually in 2020, due to higher associated gas production from oil-directed rigs and easing of the pipeline capacity constraints out of the Appalachian and Permian basins.

Next year, production will drop by 0.7 percent on the year due to expected low natural gas spot prices in 2020, which will reduce drilling activity in the Appalachian basin, the EIA said.

In the Appalachian basin, low natural gas prices are eating into the earnings of producers. The largest producers in the region spent a combined US$500 million more on drilling than they realized by selling oil and gas in Q3 2019, an analysis from the Institute for Energy Economics and Financial Analysis (IEEFA) showed in November.

“Despite booming gas output, Appalachian oil and gas companies consistently failed to produce positive cash flow over the past five quarters,” IEEFA said.

Much of the gas glut comes from the Permian which “has become so uneconomic that some oil producers simply burn their natural gas rather than selling it,” IEEFA’s analysts noted.

“No one wants to flare gas; that is like burning money!” one E&P executive said in comments in the latest Dallas Fed Energy Survey.

Another executive noted: “The price of natural gas is going to stay low for some years due to associated gas coming online as infrastructures are built out.”