Innovation in the exploration and production (E&P) sector has helped drive rapid natural gas supply growth since last year, but the market shouldn’t assume this pace of growth will continue, according to BP North America Gas & Power’s Josh McCall, who directs fundamental analytics.
A surge in Lower 48 dry gas production since January 2017 has pressured gas prices even as demand has proved sturdy enough to keep storage inventories well below recent averages. However, while the prospect of continued production growth has taken a some risk premium out of the forward curve, that outlook could change, McCall said during a presentation at the recent LDC Gas Forums conference in Chicago.
“One thing to keep in mind, the market does respond to prices” as it did during the commodities downturn a few years ago, so “don’t necessarily take it for granted that production will grow forever,” McCall said. And “there’s not really a consensus on what growth is going to look like going forward.”
One risk factor driving uncertainty in the production outlook is infrastructure. To sustain the kind of growth rates seen recently from Northeast producers requires more infrastructure buildout, he said.
“It’s not just the Northeast,” McCall said. “The Permian, in particular, has a lot of infrastructure that’s needed, and it’s not just natural gas,” but also oil and natural gas liquids (NGL). “So if I’m going to get that associated gas to market, I need all that infrastructure in place,” including processing, NGL fractionation, and pipeline takeaway capacity.
McCall delivered his remarks prior to Wednesday’s record-low Waha spot prices, which have coincided with a number of downstream restrictions to provide one the clearest signals to date of the Permian region’s takeaway constraints.
With the U.S. gas-directed rig count showing relatively flat growth over the last 18 months or so, oil prices are likely to be “much more important going forward” for the gas market.
“As different associated basins go, it’s not just a gas pipeline story, it’s really an oil pipeline story as well,” McCall said. “So oil prices really matter in terms of what the production now looks like.”
The pace of innovation — increases in lateral lengths and productivity per rig — has also made it more difficult for analysts to forecast production trends.
“I don’t think the energy industry has really gotten the credit in terms of innovation that maybe it should have, and when I say industry, E&P in particular,” he said. “…That’s been the big story behind why so much more production has come out of the ground. Quite honestly, as an analyst, that’s been the big story around why it’s so hard to predict supply, because when you have big changes like this behind the scenes, you don’t see this in foresight. You see this as the data starts coming in, and that gives you a better idea of how production’s performing.
“I think the market overall has probably done a pretty poor job of forecasting supply, just because there’s been so much innovation and technology change happening below the surface.”
McCall also touched on shifting dynamics in equity markets that could impact production growth.
“It seems to me like there’s a bit of a different signal being sent from investors,” he said. “It seems like we’re shifting more from being rewarded for growth to being rewarded for profitability, and you see this real-time in equity prices when earnings releases come out, when producers talk about whether there’s going to be a dividend increase or a share buyback.
“There are a lot of real-time signals coming into the market from an equity perspective that are quite a bit different than just two or three years ago, and that could have an impact on producer behavior going forward.”
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