Natural gas production cuts not enough to boost prices
Storage levels worry analysts
The adage once heard in the oilpatch that the remedy for low natural gas prices are low natural gas prices has gone the way of single-stage fracturing, industry insiders lament.
Despite exposure to increasingly lower prices in the past 18 months, drilling for natural gas and natural gas production haven’t dropped enough to boost the resource value.
“Everybody you talk to will say it’s only a matter of time until we end up with a more rational market,” Michael Tims, chairman of investment brokerage Peters & Co., said about low natural gas prices. “But I think all this is taking longer than people thought it would do.”
Natural gas prices have fallen by half since last year, to about $2.50 US per million British thermal units, with little relief in sight as analysts debate whether pledges to reduce output will be long-lived enough to affect the market.
Canadian producers already have slashed spending on natural gas drilling, at least on dry targets. About 40 per cent fewer natural gas wells have been drilled so far in 2012, with approximately 500 million cubic feet assumed shut in, noted Tims, “but in the scheme of North American production, that’s not much.”
Marketable natural gas production in the U.S. will reach 68 billion cubic feet per day, while overall production rose five per cent in 2011, the U.S. energy department said.
“So far, the lower rig count has not impacted production levels, partly reflecting improved drilling efficiency,” said the Energy Information Administration in its most recent short-term outlook.
“However, fewer horizontal natural gas wells, particularly in areas such as the Haynsville shale, contribute to smaller, short-term production declines through June. These declines reverse later in the year as prices rise, wet natural gas production rises and associated production from oil wells increases.”
Mike Zenker, with Barclays Capital in New York, says he thinks it unlikely producers will cut production enough to make any effect on prices.
“We do not believe that across the producer universe producers have the discipline to cut that much production,” he said.
“A couple have announced it, Encana and Chesapeake, but it has not been across the board and not of a size sufficient to really move prices.”
The Haynsville cuts in Louisiana amount to about one bcf per day off of 7.5 bcf production, a lot for the region, but not meaningful for the market, Zenker said. Meanwhile, natural gas production from the Marcellus shale in Pennsylvania is expected to reach six bcf per day, realigning the flow of gas in the region, up to Canada and southeast to Louisiana.
The big unknown making markets nervous is how full storage on both sides of the border will be exiting the winter season. High levels of inventories as the injection season starts could force excess volumes onto an already soft market in the fall, further pulling down prices.
“Given the enormous amount of spare gas that we have in the market, that means some of it could get forced out,” Zenker said. “This is a lateMarch, early-april problem that is keeping the market on edge. And it could set a new low price point just because we might physically be seeing gas pushed on to the market that is not needed.”
In Western Canada, the active rig count at the beginning of March was five per cent higher than the year before, at about 598 rigs. At the same time, the number of well licences fell seven per cent to 2,944, year-to-date, according to Nickle’s Daily Oil Bulletin.
Well completions have fallen substantially since Jan. 1, down 34 per cent from 2011, to 1,870 completions.
Analysts remains skeptical about the correlation between a lower gas-rig count and lower production, noting technologies such as horizontal multistaged fracturing have increased productivity and reduced the number of wells.