With U.S. natural gas production on track to grow at least 3.6% in 2008 versus a year ago, producers won’t be able to lay down rigs fast enough to offset the unprecedented growth and thus face a “high possibility” of forced shut-ins and regional basis blowouts next summer, Raymond James & Associates Inc. reported Monday.
Disruptions caused by hurricanes Gustav and Ike in early September hardly dented U.S. natural gas output in 3Q2008, Raymond James energy analysts Wayne Andrews, Kristal Coy and Cory Garcia said Monday in a Stat of the Week. Raymond James since 2001 has tracked reported gas output from publicly traded U.S. exploration and production (E&P); the analyst’s E&P universe follows about half of the total domestic gas production.
Until 2007, Raymond James E&P universe consistently reported lower gas volumes, even at higher drilling rates. However, as gas shale and tight gas output skyrocketed, the trend reversed in 2007 and it shows no signs of a slowdown.
“If we add back the offshore hurricane-related shut-ins reported by the Minerals Management Service (MMS) during the third quarter, of which we conservatively assume 65% can be attributed to the large, publicly traded producers covered by our survey, we come up with an underlying growth rate (ex-hurricanes) of a staggering 8% year/year (y/y) for 3Q2008,” the Raymond James analysts said.
“Importantly, we believe that another 0.5-1.0% (0.1-0.3 Bcf/d) could realistically be added to the underlying growth rate given the noticeable disruptions to onshore production due to power outages at processing facilities and pipelines after the hurricanes,” said the trio. “All-in, this quarter represented the highest y/y growth rate in the history of our survey, falling in-line with the steady up-trend in U.S. supply growth we have seen over the past two years.”
More E&Ps will have to cut their capital expenditures (capex) for the first time in years, said the analysts. Chesapeake Energy Corp. is among those that already have announced plans to cut their spending through at least 2009 (see Daily GPI, Nov. 3).
“In fact, we believe bottlenecks, widened differentials, and late storage refill season bloating will force some producers to shut-in gas production,” said Andrews and his team. “Our contention is that onshore supply growth momentum will take time to slow, and the reduction in activity levels may be too late to impact 2009 pricing.”
On the surface, they wrote, “one would believe that the 20-25% cuts to next year’s E&P drilling budgets should serve to reverse the onshore supply growth engine in a relatively short timeframe — the law of high decline rates, right? However, as producers high-grade drilling activity, the first rigs to be laid down will typically be the least productive and therefore have much less of an impact on slowing supply growth. In fact, as counterintuitive as it may seem, the top 25 U.S. gas producers (excluding majors) are still looking to grow production by 15+% (roughly 2.5 Bcf/d) in 2009 despite ratcheting back spending by some 10-15%.”
Of the E&Ps surveyed that have formal budgets already announced for next year, nearly all plan to spend less than in 2008, said the analysts. Individual cuts range from “0% to nearly 60%. Clearly, what this means is that there will be a drop in rig activity, but as we’ve noted, the group as a whole is still guiding to, on average, gas production growth of 10-15% even with the large reductions in spending.”
Only a few of the independents with a “sizeable” resource play portfolio drove a big part of the group’s growth in the latest survey, Raymond James noted. “Without the impressive organic growth from Chesapeake Energy, EOG Resources, Petrohawk Energy, Ultra Petroleum, Williams Cos. and XTO Energy, the E&P group’s nominal (including hurricanes) y/y growth would not have been 11.5%, but rather 7.9%.”
Raymond James’ survey covers roughly 50% of U.S. gas production, but its results don’t reflect the “other half” — which includes smaller, mostly privately held E&Ps. To get a general idea of the “other” output, analysts subtracted the volumes reported in their survey from industry-wide production data using Energy Information Administration Form 914. Using this admittedly “imperfect” method, the analysts surmised that private operators grew production by about 9% during 3Q2008 versus a year ago.
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