The domestic natural gas market should reach a "fundamental inflection point" in June and be "increasingly underbalanced" in the last half of the year, SunTrust Robinson Humphrey (STRH) analysts said Thursday.
However, the drop in gas output for the year is unlikely to be large, said STRH analysts John Gerdes, Cameron Horwitz and Ryan Oatman. Even with a 50% or more drop in gas drilling activity, well productivity is seen rising 25% or more this year, they said. Under those assumptions, STRH is forecasting U.S. gas output in 2009 will fall 0.1 Bcf/d, or around 0.2%, after jumping 7.5% (3.9 Bcf/d) in 2008.
Gas prices also will have to be higher than they are currently, said the analysts.
This year a 50% drop in U.S. gas drilling, or an average of 750 rigs or so for the year, "appears necessary to align E&P capital spending with cash generation, assuming a +$4.50 average gas price, and reduce production sufficiently to balance the market this year given an expected 25% year/year increase in well productivity."
Assuming there is a "modest" upturn in U.S. economic growth in 2010 and a 30% decline in oilfield service costs, "a +$7.50 gas price seems necessary in 2010 to provide the economic incentive to increase U.S. gas drilling activity the 40%+ required to raise production sufficiently to maintain gas market balance," said Gerdes and his colleagues.
"Accordingly, the gas rig count should average 1,050-1,100 rigs in '10," or 1,200 or more average by the second half of 2010, "and given this meaningful uplift in activity, well/rig productivity is expected to decline 5% next year."
The STRH analysts are forecasting Nov. 1, 2010 gas storage to be more than 3,600 Bcf. Although it is "modestly elevated in a historic context," the analysts said that level was the "necessary level of gas in storage given the growth/heightened seasonal volatility of gas-fired power generation."
Gerdes and his colleagues also noted that the "relationship" between onshore drilling and production equaled a 1% decrease in well/rig productivity in 2007. The trend "accelerated ,meaningfully in '08," they said. Last year the calibration of U.S. gas-directed rig activity (1,491 average 2008 gas rig count) and the growth in U.S. onshore gas production resulted in "an astounding 25% improvement in onshore well/rig productivity."
Even in a sub-$8/Mcf gas price environment, U.S. onshore gas output rose substantially from early 2007 through the end of 2008, said the STRH analysts.
"The marked improvement in onshore well productivity last year was largely the result of resource play capital efficiency (industry learning curve), most notably in the Fort Worth Basin Barnett Shale and Arkoma Basin Fayetteville Shale, along with increased drilling rig efficiency given the replacement of roughly 50% of the older rig fleet with new or refurbished equipment," they wrote.
Last year, the 25% increase in U.S. onshore well/rig productivity "likely comprised a 15% rig/learning curve improvement while 10% was related to a higher percentage of horizontal drilling activity," which comprised more than 30% of drilling activity last year versus 20% in 2007. Horizontal drilling should account for more than 40% of total U.S. drilling activity this year, said the STRH team.
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