The inflection point in U.S. gas market fundamentals likely will be realized this month, and the market will become increasingly undersupplied through the spring of 2010, energy analysts said Wednesday.
SunTrust Robinson Humphrey/the Gerdes Group (STRH) analysts John Gerdes, Cameron Horwitz and Ryan Oatman studied a variety of data to compile the latest Energy Insight report, which concluded that the gas supply correction is at hand.
“Given our expectation for 650 gas rigs in operation [during] the latter third of this year, U.S. gas supply should decline 3.5 Bcf/d (6%) y/y [year/year] by year-end and reach a nadir of 5 Bcf/d (9%) peak-to-trough decline in spring of ’10, assuming a material ramp-up in drilling activity commences at the start of next year,” wrote Gerdes and his team.
Industrial demand in the first six months was down 12% y/y, while gas-fired power demand increased modestly by around 1 Bcf/d “to the detriment of comparatively priced coal-fired power,” the analysts wrote. For the rest of the year STRH is forecasting industrial gas demand to approximate that in the last half of 2008, with gas-fired power generation demand continuing to increase.
If their assumptions are correct, “the U.S. natural gas market should reach a fundamental inflection point this month,” said the STRH trio.
“A $4.25 gas price in ’09 should lower U.S. gas drilling/production sufficiently to reestablish gas market equilibrium…,” said Gerdes and his colleagues. “Next year, a $7.50 gas price appears necessary to increase U.S. drilling activity the 30% necessary to raise production sufficiently to reassert gas market balance. Accordingly, the gas rig count should average 1,000 rigs in ’10…”
Barclays Capital’s Jim Crandell, Biliana Pehlivanova and Michael Zenker used Smith Bits data to examine regional gas drilling trends in the United States.
According to the Barclays analysis, onshore gas drilling has fallen the most in the Permian Basin, down 79%, followed by the Rockies, where drilling is off 57% from last year. Meanwhile, the aggregated Texas, Louisiana, Arkansas and Oklahoma area has seen a 47% decline in drilling since Jan. 1. Most resilient is the Appalachian Basin, where the rig decline overall has been 20% year-to-date.
Although drilling across the gas basins of Texas, Louisiana, Arkansas and Oklahoma area is down, “the scale of the overall losses is masking strength in the key shale plays,” said Crandell and his colleagues. “Drilling in the Haynesville (Texas and Louisiana), Woodford (Oklahoma) and Fayetteville (Arkansas) shales has been substantially more resilient than in the region overall.”
And while drilling as a whole in Appalachia has slowed, the “Marcellus Shale continues to attract interest, and its rig count is at an all-time high through the last week of data.”
As gas prices have collapsed, “producer activity in the U.S. has zoomed in on the shales that offer the best economics,” said the Barclays team. “The Marcellus and Haynesville have taken a clear lead, with rig counts in the Marcellus up 9% since the beginning of the year and in core Haynesville (Louisiana) down by just 2% year-to-date.”
Of all of the producing shales, drilling in the Barnett Shale of Texas has plummeted the most, reflecting the higher costs of doing business as productivity in the aging play declines.
©Copyright 2009Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |