Gas-on-gas competition is a concept long established in the industry. How about shale-on-shale competition?
Besides prolific output, one of the main attractions of shale gas to producers is the lower costs nearly always associated with getting shale well flows into a takeaway pipe, tending to result in higher wellhead netbacks. But conventional production must bid down against shale competition, which has forced lower gas prices overall, says Bentek Energy analyst Matt Marshall.
Keep in mind, though, that some shales are competing head-on with other shales, he added. For example, some gas from the Barnett travels to Gulf Crossing Pipeline, which competes downstream with East Texas gas and Haynesville gas, Marshall said. Indirectly, that same gas also competes with the Fayetteville Shale and even the Marcellus Shale.
And, although in the overall scheme of things shale output will prove more advantageously economic than conventional gas to a producer, it isn't necessarily so, Marshall said. "Netbacks will depend on lease operating expense and gathering/transportation costs. These two classes of costs make up the marginal cost of production (or, maybe better, a marginal cost of sales). Those wells with lower marginal cost of production will have the best netbacks. It doesn't matter if it's shale, tight gas, CBM [coalbed methane] or conventional. There are shale wells that have high levels of impurities that must be treated, lots of liquids that require processing, and other costs such as compression or high gathering fees."
And when a dry shale goes into head-to-head price competition with a "wetter" shale, it's almost always the richer gas with associated crude oil and/or natural gas liquids (NGL) that will win because of the extra profit uplift from selling the oil and NGLs, Marshall said.
Many shale producers refuse to lay down rigs of their own volition even though that could help support prices down the road. But some analysts anticipate a growing squeeze on the availability of completion services and/or takeaway capacity may force involuntary drilling slowdowns. If that happens, Marshall sees an identical price effect for both shale and conventional gas, largely because "North America is extremely interconnected now that the massive transportation buildout over the last several years has created excess capacity almost everywhere."
The overall strength of the cash market during the past week did not bypass shale prices. As of Thursday shale numbers were 20-30 cents or so above week-earlier levels. The Gulf Coast plays tended to see the smallest gains of about 20 cents or slightly more, while increases in the Midcontinent, Northeast and Rockies were generally closer to 30 cents.