Rocky Mountain producers, facing ever-widening basis differentials, are cutting back on natural gas production due to a lack of immediate demand, as well as a deficit of storage facilities and takeaway capacity in the region, a veteran energy analyst says.

“If you look at the cash markets today [Thursday], you’d just simply retch,” with Rocky Mountain prices fetching between 65 cents to $1.06 compared to $5.81 at the Henry Hub, said John Olson, co-manager of Houston Energy Partners. “There’s nobody up there that I’m aware of who could make money producing gas at less than $3-4.”

There has been a “big air pocket in the gas market that has been painfully apparent for the last six or seven months because the basis differential between the Rockies and Henry Hub has been well over $3,” he noted.

Producers “are looking at pretty ugly basis differentials there,” and Olson does not expect the situation in the Rockies to get any better for at least another 60 days. He noted that 60 days is a long time for producers, especially “if you need the cash flow.” But “hopefully it’s going to get cold again beginning in November and the heating season will be upon us. That should start to stimulate the market,” he said.

In the meantime, “anybody who is unprotected via hedging is going to have to consider cutting back production substantially.” Natural gas prices have taken the severest beating in the Piceance Basin in southwestern Wyoming over into the Uinta Basin, and in the Powder River Basin in northeastern Wyoming, according to Olson.

One Rocky Mountain producer acknowledged that his company has shut in some production in an effort to balance supply and demand and match supply with limited pipeline capacity. “It’s a difficult time,” he told NGI.

“While we are shutting in production, we are not [publicly] saying right now that we’re cutting back on drilling activity. We’re still counting on REX [Rockies Express pipeline] being on time, and so far they’re on schedule. There’s just no reason to sell gas at $1.80 to $2, which is the price right now at Opal, when we could possibly get $6-$7 four or five months from now,” he said.

A spokesman for Calgary-based EnCana dismissed reports that it has curtailed production in the Piceance Basin and in Jonah Field in southwestern Wyoming. “We have established basis hedges to reduce the risk” of low prices, spokesman Alan Boras said. The second-quarter average basis hedge was $67 cents/MMBtu, which allowed EnCana to sell its gas for more than $5, he noted.

Even producers outside of the Rocky Mountains are curtailing production. Oklahoma-based Chesapeake Energy Corp. earlier this week said it planned to reduce its natural gas output by roughly 125 MMcf/d, or about 6% of the company’s current net production, in response to low gas prices. The production cut would be focused in the Fort Worth Barnett Shale, South Texas, Deep Haley and Anadarko Basin areas (see Daily GPI, Sept. 5).

The depressed Rocky Mountain price for natural gas is due to “an accumulated problem of gas storage levels rising faster than you’d like; producers were impacted by all of the LNG [liquefied natural gas] imports in the early summer; and there has been a very mild cooling season in most parts of the country. As a result, there has not been much in the way of air conditioning load,” Olson said.

“I think it’s mostly a lack of immediate demand coupled with lack of storage in the Rocky Mountains and lack of surplus takeaway capacity where producers can export” their gas to Midwest and eastern markets, he noted.

Olson expects the market for Rocky Mountain gas to significantly improve in January, when the second leg of the mammoth REX is scheduled to be completed. This leg, which will extend to Missouri, will provide Rocky Mountain producers with 1.5 Bcf/d of takeaway capacity.

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