“Headline” U.S. natural gas production continues to move higher, but signs of decline are emerging in some onshore plays, according to Barclays Capital energy analysts. Low gas prices also aren’t likely to encourage explorers this year, according to a Standard & Poor’s Ratings Services (S&P) analyst.
Barclays analysts Biliana Pehlivanova and Shiyang Wang wanted to understand the “magnitude” of the decline in dry gas output beyond the big growth areas. Four regions stood out because of headlined growth: associated gas produced from oil wells in Texas and North Dakota, as well as dry gas output in the Marcellus and Fayetteville shales. Those growth figures then were compared with aggregate output in the Lower 48.
“We estimate that gas production in the Marcellus, Fayetteville and gas from oil wells in Texas and North Dakota added 3,150 MMcf/d through September in 2012,” they wrote. “We find that outside of these four regions, Lower 48 dry gas production dropped 2,850 MMcf/d in the first nine months of 2012, in line with gas-directed drilling trends.
“We reiterate our expectation for aggregate U.S. Lower 48 production to tip into declines in the second half of 2013. Revisions to historical production data caused our year/year (y/y) production growth estimate to inch slightly higher. We expect 2013 dry gas production to average 64.95 Bcf/d, up 180 MMcf/d versus 2012.”
Overall, the four areas analyzed by Barclays “contributed 3,200 MMcf/d of y/y production growth in 2011 and 4,800 MMcf/d y/y through September in 2012. Given overall dry gas output, this implies that excluding these areas, ‘other’ Lower 48 production grew by 1,200 MMcf/d y/y in 2011, but declined by 1,100 MMcf/d y/y in the first nine months of 2012.” Those “other” contributors were the Haynesville and Barnett shales, as well as dry gas from the Eagle Ford Shale.
The trajectory of “other” Lower 48 gas output “mirrors drilling trends,” said the Barclays team. “By September 2012, ‘other’ Lower 48 production was down 2,900 MMcf/d from January 2012. Since tipping into declines at the end of 2011, ‘other’…output has dropped, on average, 375 MMcf/d each month.”
If the declines continue on their current track, the “other” dry gas output would fall by more than 3,900 MMcf/d this year, Barclays projected. “In this scenario, a repeat of last year’s strong growth of Marcellus and associated gas in Texas and North Dakota, coupled with a modest drop in Fayetteville production, would result in aggregate…output growing about 400 MMcf/d y/y on average in 2013.”
The Energy Information Administration on Tuesday said total marketed gas production should climb to 69.8 Bcf/d in 2013 from 69.2 Bcf/d in 2012, and to drop slightly to 69.5 Bcf/d in 2014 (see related story). Growth in Lower 48 onshore output, driven largely by the Marcellus Shale and other unconventional plays, is forecast to climb through 2014, offset by Gulf of Mexico declines.
The Barclays analysts said as of September, which was the final month for which examined data was available, the “other” production in the Lower 48 may not have reflected the full effect of the 2012 pullback in gas-directed drilling. Last year the gas rig count averaged 639 from January through June, and it was at 442 at the end of September.
“While some production areas have been in a decline throughout 2012, others are only now tipping into sequential losses,” the analysts said. “If gas-directed drilling remains at current levels throughout 2013, on average, drilling activity would be down 20% y/y. Without a meaningful rebound of gas-directed drilling outside of the Marcellus and Fayetteville shale plays, we believe the declines in ‘other’ Lower 48 are poised to persist and accelerate.”
S&P’s Ben Tsocanos expects U.S. gas output this year to be roughly flat with last year, “even though the pace of drilling new gas wells has slowed.” Part of the output is expected to lag because of the time it takes for companies to complete wells and connect them to gathering systems.
“And although gas production is likely to fall after 2013, the decline will probably be less than directly proportional to the drop in number of rigs,” in part because of drilling efficiencies.
Domestic gas prices also aren’t likely to entice operators this year, except for many of the biggest oil and gas companies, such as ExxonMobil Corp., said Tsocanos. “Although prices have gained some lost ground, they remain substantially lower than before the economic crisis of 2008.”
Following a mixed 2012, Raymond James & Associates analysts don’t expect “big” energy stock gains this year (see related story). “In the context of our below-consensus forecasts for both oil and gas, in total we are entering 2013 with the lowest proportion of buy-rated stocks in the past decade. The market’s jittery, risk-averse sentiment again underscores the importance of selectivity.”
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