"Very weak gas prices" are in the offing as drilling to hold leases, cost-carry joint ventures and the disparity between oil and gas prices "are expected to push gas production so high that it causes some regional storage and pipeline constraints..." Bentek Energy LLC said in its latest Market Alert.
However, the Evergreen, CO-based consultant said, "Producers have fundamentally changed the economics of their business, setting the stage for a long period of sustainable growth."
Production growth is expected to begin slowing in the second half of the year as held by production (HBP) obligations expire and storage/pipeline operational limitations force producers to put on the brakes. As this occurs, gas prices are projected to come under significant downward pressure, signaling producers to tighten capital budgets and scale back drilling, according to Bentek's "The Sky Is the Limit? U.S. Shale Gas Soars!"
By this fall storage will be at record levels and gas will cost less than three bucks at Henry Hub, Bentek said, given demand projections that are based on normal weather. Under the firm's base case, working gas in storage will be at 4 Tcf by Halloween. The base case also projects 5% production growth this year.
HBP drilling will slow, "...but expiring HBP obligations also will allow operators to shift rigs away from peripheral HBP leases and concentrate activity in the sweet spots (i.e., high-Btu gas plays) in order to increase margins in a low-price environment," the report said.
"There will be a difficult period of market adjustment over the next 12 to 18 months," said Bentek Managing Director Rusty Braziel. "However, corrections on both the supply and demand sides of the equation are expected to bring the market back into balance in 2012. By 2013, we forecast a slower but more sustainable growth trajectory as drilling activities finally become more price responsive."
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