U.S. natural gas supply growth is much more resilient than the market now believes, and producers “likely” will have to shut in more than 1 Tcf of natural gas sometime this year, energy analysts at Raymond James & Associates Inc. said last week. To return balances to 2011 averages, Barclays Capital said U.S. gas output needs to curtailed by an average of 3.2 Bcf/d for the year, or just under 5% of flowing U.S. gas supply.

Raymond James late last month modeled a 40% reduction in U.S. dry gas-related drilling for 2012 (see NGI, Feb. 6). However, after reviewing “the pulse of each major basin,” overall domestic gas supplies should continue to increase for the foreseeable future.

“Most interesting is the level of impact that associated gas production from oil and liquids plays will have on supply as operators flock to tap into nongas options,” wrote Raymond James’ J. Marshall Adkins. “Expect the recent surge in activity in oil/liquids plays and the Marcellus [shale] to translate to supply growth that should more than offset declines in dry gas plays. We see significant forced gas production curtailments in the summer of 2012. At the very least, this should keep a lid on summer gas prices. At the worst, we could see a $1 handle on Henry Hub gas prices for the first time in decades.”

The dim view of the gas markets led the team to cut its 2012 gas price forecast to $2.50/Mcf from $3.25, and to reduce the 2013 outlook to $3.25 from $4.00. “Long term, we are lowering our forecast from $4.50/Mcf to $4.00/Mcf.” It’s the fourth time since last October that the Raymond James team has revised down its domestic gas price forecast (see NGI, Jan. 9; Dec. 12, 2011; Oct. 17, 2011).

“We’ve had our U.S. natural gas bear claws out for a while now,” said the Raymond James team. “Since late 2007, it has been clear to us that growing technology-driven U.S. gas supply was going to create a glut in the U.S. natural gas markets. With gas prices now struggling to gulp for breath above $3/Mcf levels, we must face the questions: just how low can it go and how long will it stay there?

“In the past, those questions were much easier to answer since the supply end of the equation was driven by a fairly simple analysis of gas drilling activity and gas well productivity. Today, it is much more difficult given the unprecedented shift to oil- and liquids-rich gas plays that have very nonhomogeneous gas production profiles. Accordingly, we have developed a proprietary, basin-by-basin U.S. production model (based on regional production curves) that allows us to get a better view of the impact of increased oil- and liquids-rich gas drilling upon the overall U.S. gas market. Unfortunately, that view is not very pretty.”

Assuming the dry gas rig count falls by more than two-thirds this year — from more than 300 rigs now drilling to 100 active in 2013 — the Raymond James U.S. gas production model still indicates “substantial” U.S. supply growth for the next two years.

“In fact, we believe U.S. gas supply will grow nearly 6 Bcf/d in 2012 followed by an almost perpetual oil-driven gas supply growth of over 2 Bcf/d in 2013 and beyond,” wrote Adkins. “Even though gas demand growth from coal-to-gas switching and industrial demand is offsetting some of this supply growth, the reality is that U.S. gas producers will likely have to shut-in more than 1 Tcf of natural gas sometime this year. Yes, that is over 1,000 Bcf!”

The Raymond James team said it doesn’t think the market “appreciates the headwinds in the long-term gas situation. We anticipate that gas supply declines from dry gas basins will be more than offset by growth in associated gas volumes from liquids-rich gas and oil plays to the tune of over 2 Bcf/d of supply growth in 2013 and beyond.”

Technology, noted the analysts, has given a huge boost to U.S. gas. For example, in the Haynesville Shale gas production has risen to nearly 7.5 Bcf/d from just 0.5 Bcf/d in 2007.

“Five years ago, this would have been inconceivable. In fact, major new gas plays (Haynesville, Marcellus, Fayetteville, Barnett and Pinedale) have exploded to represent over 30% of current domestic dry gas production, compared to just below 10% in 2007.”

Some producers “sensed a storm coming” and began to lease liquids-rich properties and reallocate capital. However, “this shift away from dry natural gas has now proven to be too little, too late.” Extremely mild weather and a big storage supply should force producers to curtail a lot of gas this year.

“Between mild weather (2.5 Bcf/d) and gas supply growth (5.8 Bcf/d) we will need about 8 Bcf/d more demand, less imports or shut-ins to balance the system in 2012,” they wrote. By examining the ups and downs of Canadian imports, Mexican exports, coal-to-gas switching, industrial demand and nuclear/hydro, the analysts said they expect to see 4-4.5 Bcf/d of increased gas demand or reduced imports, which would offset about 8 Bcf/d more supply.

“Assuming we can store modestly more gas than last year, this means U.S. gas producers will need to shut in at least 3 Bcf/d of gas (or over 1 Tcf of gas) during 2012. Since these shut-ins are only likely to begin in earnest during the summer, this would suggest 5-10 Bcf/day of shut in gas during the summer…The unknown is just how low gas prices will go as operators are forced to shut in supply.”

Barclays analysts Shiyang Wang and Michael Zenker calculated that to return balances to 2011 average levels, when prompt month prices averaged $4.04/MMBtu, “producers would need to curtail about 3.2 Bcf/d, on average, for the year…or just under 5% of flowing U.S. gas supply. That is, the market would need five times the level of announced cuts to reach $4.”

With a 5% cut in domestic output, “we estimate that prices would rise to about $4.00/MMBtu, a 31% jump from levels we expect for this year. The boost to a typical producer’s cash flow would more than make up for the lost revenue from a lower level of production. This asymmetrical reward has always been available, but perhaps has never been so tempting as in the current glutted market.”

The “contemporary market has never witnessed this level of production cut,” said the Barclays duo, but “some market watchers are expecting a producer response to chronically lower prices.”

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