Since 2011, Natural Gas bulls have been pointing to a decrease in production of NG, but stubborn production has refused to come down. It even increased despite drill rigs numbers dropping by half while prices dropped by 65%. Why is production still increasing? Associated Gas? Phantom wells? Delay in infrastructure?
A Closer Look - It's About Marcellus
Examining production data, we discover that it is less of the above and more about one factor. Marcellus. Or rather producers hopping from booming play to play, taking the best parts. Even as rig numbers decreased production continued to increase, but mainly in Marcellus.
Next Texas, the home of the Barnett play.
- Notice the biggest growth in production began in 2007 - 2009. It rises from 15.5 BCF to 20 BCF, 5 BCF/Day increase.
- The drop in production from 2009-2010.
- This is followed by a mini surge back to 20 BCF due to Horizontals.
- The small drop in 2012 onwards. Yes production has started to drop.
- This is the home of the Haynesville Play.
- This time the surge is from 2010-2011. It's a very sharp increase from 4BCF to 9BCF.
- We again see production starting to drop from mid 2011 onwards. There does not seem to be a bounce as this play is not as economical compared to the others.
Other States - Marcellus PA
- The big production growth is between 2011-2012. It goes from 16BCF to 22BCF, 6BCF. This is mainly from Marcellus.
- The boom has 'moved' to PA.
- The increase in production makes up for the drop in the previous 2 plays.
Play to Play Musical Chairs
- So we observe a similar theme among the 3 plays. Each play shows a rapid surge in production (usually for 1.5 years) and then moves on to the next play from year to year.
- The surge is regardless of the price of NG during the period.
- After which production flattens and starts to decline slowly.
Why does this happen?
Companies rush from play to play to get to benefit from 'first movers advantage'. Prices of the play are generally lower and better real estate is available to firms moving in first. This results in the 'blockbuster' wells. The wells everyone hears about. Huge production, low decline curves. A cry of the new 'best play'. Firms that drill first are able to produce very low per mmbtu costs and thereby sustain title.
This is no different from a real estate boom. First, top grade central real estate rises. Then it moves out a little to the fringe. Finally, it reaches the suburbs.
We observe that most plays start to decline 2 years after the first surge. This is probably a combination of well curve declines and lack of investment as royalty, costs and lack of choice real estate make more projects less economical - When "All The Good Stuff" has been taken.
Less economical plays decline more rapidly than those with better fundamentals. Texas vs Louisiana.
The current boom in production is due to Marcellus which has surged the most, picking up decreases from other plays. CHK has been biggest driving force in most new plays.
Drill rig numbers matter less in play to play due to the high initial production of wells and somewhat improved production from Horizontals (see Texas).
To NG bulls. Keep the faith and stay the course. The Marcellus play is soon coming to the 2 year decline point, which will mean production will start to tail off and follow rig numbers down. This is bullish for NG in the medium term.
Long ETF's would be the most direct way while NG stocks offer a longer holding timeframe.