Despite “a major supply glut,” the natural gas-directed rig count has crept up, and oil-focused drilling in shale plays also is yielding natural gas, so analysts at Bank of America Merill Lynch (BofA) have raised their 2012 forecast for production growth and cut their price forecast.
Domestic gas production growth is now expected by BofA to be 2.2 Bcf/d next year, an increase from the previous forecast of 1.9 Bcf/d. U.S. natural gas prices are now expected to average $4.30/MMBtu, down from the previous forecast of $4.70/MMBtu, BofA said.
Barclays Capital retreated even further in its price forecast, cutting its outlook for 2012 to $3.80/MMBtu from the previous forecast of $4.55/MMBtu. “Natural gas is similar to Powder River Basin coal: how much do you want? It is not resource constrained, and supply is driven more by producer motivations — as determined by investors, we believe — than any other factor,” Barclays said. The firm is in step with BofA on its 2012 supply growth outlook: 2.2 Bcf/d.
“While supply is surprising to the upside, demand is doing just the opposite,” wrote BofA analyst Sabine Schels and colleagues. “Industrial gas demand has been growing at the slowest pace in almost two years over the past few months and is now on track to gain only 0.4 Bcf/d this year.”
In addition, recently watered-down Environmental Protection Agency rules for cross-state emissions are not expected to be the boon to gas demand for power generation they were once thought to be, the BofA analysts said. Still, the gas keeps coming.
“So far this year production is up an average of 3.7 Bcf/d relative to last year, and marketed production now exceeds 66 Bcf/d,” the BofA analysts said. “Growth has been led by Louisiana, Texas and other states with strong shale gas output like Pennsylvania (which houses the Marcellus Shale play). These areas are clearly making up for declines in the Gulf of Mexico where drilling remains constrained.”
U.S. natural gas production has risen by 20% over the last five years, from 18.051 Tcf in 2005 to 21.577 Tcf in 2010, according to the Energy Information Administration (see Daily GPI, Oct. 21).
Back in June Barclays raised its 2012 price outlook, partly on the belief that diversion of rigs from natural gas to oil and liquids-rich drilling would yield a reduction in net gas supply per rig month. In a note Tuesday Barclays analysts wrote, “…[I]t seems unlikely that there will be a sufficient diversion of rigs to oil to provide a bullish catalyst for gas prices anytime soon. While the oil-directed rig count is growing, as is the liquids-rich rig count, the gas rig count is holding fairly steady, thanks to an influx of new rigs.”
Producers remain undeterred by the supply glut, in part because of efficiency gains and infrastructure buildout, particularly pipelines, that supports increased production, BofA said. Some companies have reported third quarter production that exceeded their previous guidance, they said, noting that Encana Corp. drilled 164 wells in the last quarter, 44 fewer than a year ago, yet it grew output by 6% thanks to efficiency gains.
“Joint ventures and take-over deals also mean that operators in the best acreage plays face little cash constraints,” BofA said. “Finally, it is also important to note that the full-cycle economics of most of the shale plays are still profitable at the current future prices.”
Increasingly, gas is becoming a byproduct of oil production, with more than 20% of the required annual supply growth now linked to oil production “and thus produced at zero cost,” the BofA analysts said. This is up from less than 10% a year ago. Because gas and oil are becoming increasingly intertwined, it is becoming more difficult to differentiate an oil-directed rig from a gas-directed rig, the BofA analysts said.
“The backlog of completed but not producing wells will also add to future supply once prices strengthen again,” they said. “All of these developments suggest that there is no gas supply pullback in sight over the next six months.”
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