US crude producers eyeing natural gas again

Some US shale oil producers are starting to shift spending toward natural gas production as the outlook for gas prices improves.

Continental Resources said this week that starting in the second quarter it moved some of its Oklahoma drilling to gassier areas in anticipation of stronger gas prices in 2021. By using hedges to lock in prices, the company expects to have the flexibility to drill for whichever commodity has better margins.

"We expect to capitalize on increasing gas prices in 2021, while deferring some of our strong oil projects for higher price opportunities until the back half of 2021," Continental chief executive William Berry said today.

Meanwhile, EOG Resources announced a new natural gas find in Webb County, Texas, with an estimated 21 trillion cubic feet (Tcf) of net resource potential in the Austin Chalk and Eagle Ford shale formations. The company said it has identified 1,250 premium drilling locations and has drilled 17 wells so far.

"The prolific Austin Chalk wells generate rates of return that are competitive with EOG's large inventory of premium oil plays," EOG said yesterday.

While the successful combination of hydraulic fracturing and horizontal drilling was first refined by companies seeking natural gas during an era of high gas prices, using those same techniques in oil production ultimately decimated US natural gas. Since most oil production also produces varying volumes of natural gas, the surge in shale oil production flooded natural gas markets.

But the steep drop in crude production that began earlier this year in response to Covid-19-related travel and work restrictions has had a bullish effect on US natural gas prices.

Then last month, a brief period of unusually cold weather lifted demand. So after a year of weak realized prices, the spot market has regained value. South Texas gas is around the same price as a year ago on the strength of exports to Mexico and demand for LNG. Producers in the region can lock in sales for 2021 at prices about 50pc higher than the daily levels of the past 12 months.

Not every region benefits in the same way. Oklahoma gas markets are tied to space heating needs in the upper Midwest that can fluctuate. Calendar 2021 pricing for midcontinent production on a forward strip basis is about 25pc higher than the dailies of the past year.

The EIA forecast for the lower-48 states this winter was for temperatures to be about 4pc lower than last winter, which may sustain price gains.

But shale oil producers' enthusiasm for natural gas still has its limits. In an earnings call with analysts this week, Pioneer Natural Resources chief executive Scott Sheffield was asked whether there was a scenario where more spending would be directed to natural gas in 2021 and 2022, given the improved pricing outlook for gas.

"No," Sheffield said. "It will have no effect."

By Tom Fowler and David Givens