With natural gas prices at their lowest level in years, U.S. explorers will have to stop drilling for economic reasons, right? Anadarko Petroleum Corp. CEO Jim Hackett said he thinks shut-ins are inevitable. Energy analysts with Barclays Capital Markets aren’t so sure.
Hackett, who spoke Wednesday at the North America Energy Resources Summit at Rice University’s Baker Institute in Houston, told the audience that at current gas prices, gas operators can’t sustain profitable domestic operations. By shutting in some of their wells, prices quickly would rebound, he said.
Once there’s less gas being produced, “I don’t think it will be for an extended period of time” before prices rebound above $3/MMBtu and climb to more than $6, Hackett predicted.
Anadarko, long one of the biggest natural gas producers in North America, today is concentrating its onshore gas development in only one piece of its portfolio: Pennsylvania’s Marcellus Shale, said Hackett. Beyond the Marcellus, The Woodlands, TX-based independent has switched to liquids and more oil development across a swath of onshore prospects that stretch from Texas through the Midcontinent.
Nearly all of Anadarko’s onshore gas drilling in the United States outside the Marcellus ceased in 2009, Hackett said. Once prices gain traction, the company has a bevy of attractive gassy leaseholds across the country to develop. Until then, it will continue to develop its liquids portfolio and pursue international gas projects, which include lucrative liquefied natural gas prospects in Mozambique and Australia.
Barclays analysts aren’t so sure that gas operators plan to shut in a “meaningful amount of gas” any time soon. After taking a look at September 2009, when prices fell to $2.51/Mcf, analysts Shiyang Wang and Michael Zenker are convinced shut-ins aren’t inevitable. At the time, they said, prices fell on fears that the storage complex didn’t have sufficient capacity to accommodate surplus gas (see Daily GPI, Sept. 17, 2009; Sept. 10, 2009).
“Those weeks were also marked by a handful of producers stating that they were responding to low prices by adjusting their production plans,” which was “reinforced by active trade press coverage of announced shut-ins. This no doubt contributes to a market perception that at very low prices, producers halt flowing supply, particularly if prices fall below cash operating costs.”
However, the Barclays team decided to determine how much gas actually was shut in that fall and found that only a”small amount of flowing supply was curtailed,” said Wang and Zenker. Most of the sustained shut-ins over that period “came from just a handful of producers,” and while some may have shut in output, it was “just for a few days or so, while other firms slowed the completion and connection of wells. The amount of shut-in supply peaked at under 2 Bcf/d, but on a sustainable basis, was less than 1 Bcf/d, or less that 2% of U.S. supply at the time.”
The Barclays research determined that most of the response by producers in late 2009 “was not focused on wells that were already flowing, which to us is the only form of supply that matters for short-term balances.”
Energy Information Administration supply numbers reflected a “small” pullback in gas output during the period that matched Barclays’ findings, noted Wang and Zenker. “Most of the ‘supply response’ suggested by producers appears to have been a slowdown in connecting drilled-but-uncompleted wells and connecting wells waiting on pipelines. While this potential supply was at that time quite large, probably amounting to multiple Bcf/d, it was not production that was available to flow. That firms may have delayed the addition of new wells to the market is important to medium-term balances, but does little to fix an acute over-supply situation.”
The response by producers in 2009 is instructive to today’s situation, said the Barclays analysts.
“It convinced us that producers are loath to shut in actual production. Arguably, the incentives to do so during the fall of 2009 were more powerful than those of today. Forward 2010 prices were about $3 above fall 2009 prompt month prices, suggesting that if producers would simply flow their gas later, or sell it forward, prices would be much better.”
Wang and Zenker said they believe producers respond to weak gas prices by cutting their planned drilling activity — not producing wells. “This means we expect the supply response to come in the form of [a] drilling pullback later in 2012 or into 2013. In the meantime, expect very little change in the trajectory of supply.”
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