- The natural gas market appears to be overestimating upcoming natural gas production growth.
- According to the EIA, only 1.5 Bcf of new natural gas pipeline capacity will be added in the Marcellus and Utica between now and the end of 2015.
- Several States and the Gulf of Mexico are already experiencing declining natural gas production.
Natural Gas production has been growing at a steady clip and many forecasters are assuming the slope of the growth curve will continue for the next several years. But natural gas production appears to be flattening out. Expectations of continuing growth could be unrealistic based on current natural gas prices in the mid $4 range per mcf.
The most recent monthly natural gas production report issued by the Energy information Administration [EIA] is for the month of February 2014. That report shows the highest total daily production for a month occurred in November of 2013 at an average of 75.97 Bcf per day. Since then production has slipped due primarily to winter freeze-offs, which occur almost every year. In February of 2014, production averaged 75.37 Bcf per day. That is up from 72.78 Bcf per day in natural gas production in February of 2013.
Over half of that growth is directly attributable to new pipeline capacity in the Marcellus region. The EIA issued a report on October 30, 2013, detailing an additional 3.5 Bcf per day in new pipeline capacity scheduled to come on-line between 2013 and 2015 in the Marcellus. The EIA said:
More than 2.0 Bcf/d of expansions are expected for the 2013/2014 winter alone. The largest of these is the 0.78 Bcf/d New York-New Jersey Expansion project on a portion of Spectra Energy's Texas Eastern Transmission Company (TETCO) pipeline from Linden, New Jersey, to Manhattan, New York. On October 17, the Federal Energy Regulatory Agency (FERC) authorized the start of initial service on these expansions.
Effectively, the EIA anticipates only an additional 1.5 Bcf per day of new pipeline capacity will be added in the Marcellus region between now and the end of 2015.
Natural Gas production grew from 72.78 Bcf per day in February of 2013 to 75.37 Bcf per day in 2014. That is an increase of 2.59 Bcf per day, of which new pipeline capacity in the Marcellus contributed 2 Bcf per day. This means natural gas production growth over the last year depended heavily on new Marcellus pipeline capacity.
Significantly, some states and the Gulf of Mexico are seeing a decline in natural gas production over the last year. According to the EIA monthly natural gas production report, the Gulf of Mexico saw production drop from 4.0 Bcf per day in February of 2013 to 3.32 Bcf per day in February of 2014. Similarly, the State of Louisiana saw a very sharp drop from 7.3 Bcf per day in February of 2013 to only 5.56 Bcf per day in February of 2014. It will take a large increase in the number of drilling rigs in the Gulf of Mexico and Louisiana to reverse the decline. It should also be noted that production is declining in the producing region, which is home to the Henry Hub. NYMEX natural gas futures are based on trading at the Henry Hub in Southern Louisiana.
Many analysts expect the large natural gas storage deficit to be offset by growing production. But if production falls short of their estimates natural gas will end the storage season well below projections. That could lead to a large increase in natural gas prices to encourage new production and to tamp down on demand. It could be especially difficult for the producing region to reach projected storage totals if production continues to decline in that region.
The easiest way for investors to participate in potential rising natural gas prices would be to buy the United States Natural Gas ETF (NYSEARCA:UNG). The fund invests directly in NYMEX natural gas futures for the current and upcoming month. Stocks of companies that would be positively impacted from a rise in natural gas prices at the Henry Hub in Louisiana include the nation's largest natural gas driller, Chesapeake Energy (NYSE:CHK). Other natural gas drillers investors could consider with significant operations in Louisiana that would be positively impacted by rising natural gas prices at the Henry Hub include EXCO Resources (NYSE:XCO), PetroQuest (NYSE:PQ), and Goodrich Petroleum (NYSE:GDP).
This winter cash spot prices for natural gas spiked in the second half of winter as fears of shortages ran rampant. The Polar Vortex kept coming into the U.S. over and over again. According to the EIA, storage levels started this past winter near 3.9 Tcf and ended near 800 Bcf. If production doesn't grow by the extra 3 Bcf per day by the end of the year that many analysts are expecting, then natural gas storage could enter next winter well below the expected 3.5 Tcf. The question is will that be enough? It wouldn't have been for this last winter. And just for the record, most didn't predict the Polar Vortex. Frankly, next winter remains a wildcard. If production doesn't bump up in places other than the EIA's estimated 1.5 Bcf in additional pipeline capacity in the Marcellus, then there could be shortages of natural gas in parts of the U.S. next winter should the Polar Vortex return for an encore.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UNG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.