October 19, 2017 | By Charles Nevle
Over the course of 2017 to date, natural gas production has risen 3.4 billion cubic feet per day (Bcf/d), to reverse a 2.7 Bcf/d decline in calendar year 2016. Gas production spent all of 2016 in a state of decline following the oil price collapse of the previous year. In prior articles composed in 2016, PointLogic pontificated about a ‘V’ shaped recovery. That recovery began to take shape towards the end of winter 2016/17 and has been climbing ever since.
The V-shaped recovery that was so eagerly anticipated has finally arrived. However, it came in both expected and unexpected ways. Dry gas production growth in the Northeast has certainly helped, making up 1.1 Bcf/d of the overall gain through the first nine months of 2017. But that represents, albeit for a partial year, the lowest rate of Northeast growth since 2009. The lack of a decline in smaller marginal plays, which as a group weighed heavily on production until this year, has been the stealth contributor to production growth throughout 2017.
The real story this year is that despite modest growth in the Northeast, U.S. natural gas production is rising robustly. Below is a table of year-on-year production growth. We’ve segregated out production by some of the big drivers (Marcellus/Utica, Permian, etc.) and combined others into Associated (oil-driven plays) and Non-Associated Other.
What becomes apparent from the table above is that production growth so far this year is that the results are not confined to just one dominant area, but a significant change in several areas. The Haynesville has enjoyed a turnaround from years of decline into a period of strong growth, contributing over 1.0 Bcf/d so far this year. Similarly, the Eagle Ford has turned around from a steep decline to moderate growth.
However, perhaps an even larger factor is the very moderate declines being observed in the grouping of plays tagged Non-Associated-Other, which fell by 2.6 Bcf/d last year and is nearly flat so far this year. In addition, the Associated-Other category declined by 1.2 Bcf/d. The ’decline in the decline’ of these ‘other’ categories is the stealth story this year in natural gas production where so much of the market’s focus is on oil plays and the Northeast.
The table above breaks down the broad Non-Associated Other category from Table 1. Note the decline in 2016 of 2.6 Bcf/d building on five successive years of significant declines in ‘Non-Associated Other’ gas production while so far this year production from this group has been essentially flat.
Table 3 (above) breaks down the broad Associated-Other from Table 1 into its component plays. Note that in 2016, these plays as a group decline 1.2 Bcf/d while so far this year production from these plays has been nearly flat.
An analysis of the details and drivers behind these ‘Other’ categories reveals there is no smoking gun behind the dramatic reduction in the rate of decline. No single producing area has been the primary driver of the turnaround, but instead it’s been across the spectrum.
While the dramatic increase in Permian rigs is well known, what has been less discussed is the increase in rigs in less glamorous plays. Within this selection of Non-Associated-Other producing areas, rigs have climbed by 28 since the beginning of the year, an increase of 50% while Associated-Other rigs have gained 26, or 55% over this period.
Within this growth are a scattering of rig increases: Uinta up by 7, Eaglebine up by 6, Piceance up by 5, San Juan up by 2, etc. No one region stands out as a big story in its own right, but as a class, this activity has been enough to turn what has for the past several years been a steep decline in production, to a state of equilibrium (see the thick orange and green lines) This change has been significant and has allowed U.S. gas production to grow substantially, despite relatively moderate growth in the headline plays.
Because these two groups, Associated-Other and Non-Associated-Other have been in decline for some time, the decline rates of the base gas have been more stable, and thus the ‘treadmill effect’ of drilling necessary to replace declining gas production is much less steep than in the growth plays. Nonetheless, if drilling is not sustained within this group, then the blood loss from prior years could emerge again.
Already this year, we have seen a separation in the trajectories of Associated-Other rig counts and Non-Associated-Other, with the former continuing to grow, while the latter peaked in July. Gas prices have struggled to achieve a foothold above $3.00/MMBtu this year, while oil prices, after a summer dip into the low $40s per barrel, are now comfortably hovering in the $50/bbl area.
In order to continue to maintain or grow rigs within the group of non-oily, non-Haynesville, non-Northeast plays, a natural gas price above $3.00/MMBtu will be necessary. In the short term, weather during the upcoming winter 2017/18 season will have much to say about where prices will land, but given the significant buildout of pipeline projects targeting the Northeast and continued growth in associated gas, this pause in the decline of production in Non-Associated-Other is likely short-lived. In the Other-Associated category, oil prices at their current level should be sufficient to prevent this broad group of plays from returning to a free fall.
Keep track of production in our upcoming Monthly Production Report coming later this quarter which provides a detail and forecast of production by our proprietary 92 Lower 48 Producing Areas.
Join PointLogic on November 16-17 in Houston for our Natural Gas Next: 2018 and Beyond workshop where we will be providing an update of our analysis of the drivers of gas production.