With the precipitous drop in the rig count for natural gas down to 420 rigs, the question most participants in the natural gas market have is when will natural gas production start to show a decline to mirror the decline in the rig count. The latest EIA monthly natural gas report is out for September and in it are clues that natural gas production may have started to decline in September. June is the last 30 day month available to make an apples to apples comparison to September. In June, lower 48 U.S. natural dry gas production totaled 1,960 Bcf versus 1,973 Bcf in September. On the surface natural gas production grew 13 Bcf in September when compared to June. But extenuating circumstances in both months may be masking an actual drop in potential production.
According to Chesapeake Energy (CHK) in its second quarter operations update production of natural gas was affected by curtailments of natural gas production, which averaged an estimated 330 mmcf of natural gas per day net to Chesapeake. The company ended its natural gas production curtailment program at the end of the 2012 second quarter and does not anticipate implementing a new curtailment program during the remainder of 2012. This means Chesapeake held back almost 10 Bcf in potential production in June and didn't hold back any potential production in September. Chesapeake has many joint-venture partners that it drills for with approximately another 10 Bcf per day in potential production curtailed. Just factoring in the Chesapeake directed curtailments June's production would have been 1,980 Bcf, which would be 7 Bcf higher than September's actual production.
Additionally, Chesapeake was not the only company withholding natural gas production in June. Encana (ECA) also reported in its third quarter operations update that it curtailed 15 Bcf of production in June. Like Chesapeake, Encana ended its curtailment between early August and late October. This would add another 7 to 8 Bcf in higher potential natural gas production in June versus September. Chesapeake and Encana control less than 20% of the natural gas market. Other large natural gas producers like EOG Resources (EOG), Anadarko Petroleum (APC), Conoco Phillips (COP), British Petroleum (BP), Exxon (XOM), Chevron (CHV), Cabot Oil and Gas (COG) and Ultra Petroleum (UPL) had the same market incentives to shut-in some production. So did smaller natural gas producers like Magnum Hunter Resources (MHR), Goodrich Petroleum (GDP) and Crimson Exploration (CXPO). While it remains unknown exactly how much more natural gas production was curtailed in June than was curtailed in September, just two companies curtailed more than double the reported 13 Bcf production increase in September versus June.
An important factor in comparing September production to June production are the impacts of Hurricane Issac and Tropical Storm Debby. IHS Global Insight estimates that Isaac is responsible for 28 billion cubic feet of lost natural gas production. Approximately 18 Bcf of which was lost in August as the hurricane made landfall on August 28, 2012. But that still subtracted 10 Bcf of potential natural gas production in September. In June Tropical Storm Debby curtailed almost 3 Bcf of potential gas production. Overall there was approximately 7 Bcf more of curtailed natural gas production due to storms in September than in June. Other factors impacting natural gas production that are not considered in this article include pipeline outages and outages of natural gas gathering plants not related to storm damage.
A careful look under the hood indicates that the decline in natural gas production was probably already underway in September. This should get more pronounced in coming months. The weather this winter will be the wild card in determining how much declining production will affect natural gas prices. But colder than normal weather combined with shrinking supply will at some point cause a significant rise in natural gas prices in order to raise the rig count. The article Natural Gas Prices Could Return to the Traditional Oil to Gas Ratio in 2013 discusses how high prices for natural gas could go. Investors in ETFs like the United States Natural Gas Fund (UNG) should start paying close attention to the monthly EIA natural gas supply reports in addition to the weather for insights into the potential movements of natural gas prices.