While the number of drilled but uncompleted wells (DUCs) in the U.S. oil patch is growing as producers wait for higher oil prices, the shale gas plays have seen the number of DUCs decline as drillers take advantage of higher natural gas prices this year compared to last year’s lows.
Expectations of additional takeaway capacity coming online—as well as the rebound in natural gas prices—are making drillers more confident that they will be able to sell their production at higher prices. The companies are still cautious after the downturn, but the economics of drilling an oil well and a gas well have diverged since the 2015-2016 price rout. Gas prices have almost doubled since March 2016, and drillers are hoping that a bull market is coming, analysts reckon.
However, higher production could also depress natural gas prices once again.
The Henry Hub natural gas spot price averaged US$2.98 per million British thermal units (MMBtu) in June. This compares to US$1.73/MMBtu in March 2016, which was the lowest monthly average price since December 1998. For 2016, the average natural gas spot price of US$2.49/MMBtu was the lowest annual average price since 1999.
Natural gas front-month futures contract averaged US$2.994/MMBtu in June 2017, as compared to US$1.812/MMBtu in March 2016.
Drillers in the biggest U.S. shale gas play – the Marcellus – are increasing production and finishing wells, expecting that prices will be high.
They are “putting a down payment on a bull market that companies hope is coming,” John Kilduff, a partner at commodities hedge fund Again Capital LLC, told Bloomberg.
The number of DUCs in the Marcellus dropped by 20 in June over May, to 643, according to EIA’s latest Drilling Productivity Report. The only other area out of the seven most prolific shale plays that saw the number of DUCs decline last month was another gas play in the northeast, Utica. The number of DUCs in the Marcellus was 831 as of July 2015.
Gas production, on the other hand, is expected to rise across all seven shale plays next month, with Marcellus output increasing the most, by 201 million cubic feet/day in August over July, to 19.752 billion cu ft/day.
Not only the oil patch has lowered breakevens since the oil prices collapsed—gas producers have also become leaner and meaner, according to analysts.
Producers in the Appalachian region currently have their breakevens at below US$3/MMBtu, having improved breakeven economics by 15 percent over the past year, James Williams, an Arkansas-based economist for WTRG Economics, told Bloomberg.
However, a new boom could bring natural gas prices lower again. In addition, new pipeline capacity in the northeast has faced recent setbacks, potentially pushing additional takeaway capacity further in time.
Energy Transfer Partners’ US$4.2-billion Rover pipeline project currently under construction is planned to connect Marcellus and Utica Shale supplies to markets in the Midwest, Northeast, East Coast, Great Lakes, and Gulf Coast regions of the United States, as well as Canada.
But last week, West Virginia environmental regulators ordered the project to cease and desist some land development activities in West Virginia over violations of state environmental regulations, until it fully complies with all rules.
Additional pipeline capacity would ease takeaway constraints and motivate higher production. But increased production could result in a new rout in U.S. natural gas prices.
By Tsvetana Paraskova for Oilprice.com
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