Natural gas-directed drilling in 2013 has been at its lowest average in more than 20 years, but activity should increase in 2014 on Northeast expansions alone, the first gains in the onshore since 2010, according to an analysis by Raymond James & Associates Inc.
Gas-directed drilling historically has been the most active part of the domestic landscape, but that changed beginning with the collapse in gas prices in 2008 and the surge in oil prices a year later, said analysts J. Marshall Adkins and Praveen Narra.
“In fact, for the better part of 2013, gas-directed drilling averaged only 384 rigs and has been stable around 370 rigs (or only 20-25% of all activity),” the duo said in an Energy Stat of the Week. “This is the lowest gas drilling activity levels in over two decades.”
Gas prices have seen a rebound over the past few weeks, but drilling has only increased in two areas: the Utica and Marcellus shales, they said. That trend likely will continue in 2014.
“Specifically, we expect the Utica and Marcellus to grow by 45 rigs combined” in 2014 on “extremely low breakeven economics and growing pipeline infrastructure.”
Raymond James in June had calculated that nearly every major gas play in the United States could make money at prices above $4.00/Mcf and generate a “decent rate of return” at prices above $4.25 (see Daily GPI,June 11). The analysis determined at that time that Marcellus wells were economic at prices as low as $2.50/Mcf. A similar analysis by Credit Suisse earlier this month found that not until basis differentials reached a 48% discount to the New York Mercantile Exchange, or about $2.10/MMBtu based on the curve, did Northeast natural gas become uneconomic (see Daily GPI,Dec. 13).
That economic leverage, combined with growing takeaway capacity from the Northeast, should enable the United States to see its first uptick in drilling in four years, wrote Adkins and Narra. The U.S. gas rig count should increase, but the gains only would be in the advantaged Northeast because oil drilling still offers the highest returns for exploration and production (E&P) companies.
“In fact on an energy content basis, oil has roughly six times the energy content of natural gas; however, oil currently trades at 22 times the price of natural gas,” said the analysts. “In other words all else equal (i.e., costs), the incentive to drill for oil is four times the incentive to drill for natural gas. So we still expect the vast majority of E&P drilling capital expenditures to be directed toward oil wells; however, we note that we expect gas rigs to be up on average for the first time since 2010.”
Increasing U.S. oil supply is outpacing slugging global demand, leading some analysts to speculate that oilfield service activity will decline in 2014. However, Adkins and Narra believe U.S. activity should remain stronger than falling oil prices would suggest, with 2014 domestic E&P spending up by 5-10% on “surging oil and gas production volumes and industry underspending in 2013.”
Given the “structural industry changes,” the analysts said higher spending would translate into a:
Consensus expectations for 2014 see U.S. drilling activity increasing by 3-5% in 2014, but Raymond James analysts have a “modestly lower” consensus.
“To put the word ‘modest’ into perspective, we think the U.S. rig count will fall roughly 108 rigs from 1,782 to 1,674 (or down 6%) over the next two years,” with most of the decline in the second half of 2014 and into 2015.
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