Houston, 27 September (Argus) — US natural gas producers face a major impediment to the sustained price gains their industry has been lacking for most of the past five years: themselves.
Too many companies are sitting on too many gas assets that would be profitable to develop with only modest price gains, which will probably prevent realisations from climbing and staying much above $4/mmBtu until there is a structural change in the supply-demand balance, such as exporting of LNG.
New York gas futures crept above $4/mmBtu for the first time since September 2011 in parts of March, April, May and June, only to be repeatedly batted down. Since then, prompt-month settlement prices have ranged from $3.23-$3.96 as the number of active US rigs drilling for gas climbed as much as 15pc from an 18-year low of 349 set in June.
US upstream independent Anadarko Petroleum says it will revive its domestic gas-drilling programme when prices are sustained at $4.50/mmBtu or higher. “We have an accelerator we can push on because we have a pretty significant gas inventory that we're really not pushing on today,” Anadarko senior vice president for exploration Frank Patterson said.
But Anadarko said that probably will not happen anytime soon because rival gas producers have less attractive investment alternatives and will step up drilling at a lower price level, forestalling further gains. “We think that as the commodity curve goes above $4, we are going to see a lot of companies ramp up because it's competitive in their portfolios,” Patterson said.
Supplies will come on stream quickly. Many shale wells can be drilled and completed in less than 10 days. Hundreds of US wells have been drilled but not completed because of low prices. Anadarko, the third-largest US gas producer, said an increase in its drilling for the fuel could add two or three percentage points to its overall growth rate, which would equate to as much as 140mn ft³/d.
The shale boom glutted North American gas markets, putting prices on a mostly downward trend since 2006. Gas futures dropped to a decade low below $2/mmBtu in April 2012. Prices this year have risen less than predicted by the US Energy Information Administration, which this month raised its projection for supplies heading into the winter heating-fuel season. In June, the agency increased its estimate for US gas production this year to a record 70.01bn ft³/d.
Output has continued to climb, even as producers earmark most of their capital investment for wells targeting oil and gas liquids, largely because of associated gas.
LNG exports could provide a supply relief valve. US regulators have granted global export licenses to four proposed LNG terminals, including two approvals in the past two months. The most advanced project, the Sabine Pass LNG plant on the Louisiana-Texas border, is scheduled to commence shipments in late 2o15.
Low-cost operators such as Southwestern Energy have continued to increase gas output because they can make money even at current prices. In the Fayetteville Shale of Arkansas, Southwestern has cut its typical well cost to $2.1mn from last year's average of $2.5mn and pared drilling cycles to 5.4 days from 6.7 days. Price gains prompted the company to raise its target for 2013 well completions in the Marcellus shale of Pennsylvania to 100 from 87.
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