On Friday, the Energy Information Administration released natural gas production statistics for the month of July. The report will again disappoint those analysts and industry insiders who have predicted an imminent drop off in U.S. natural gas supply in response to the dramatic decline in gas prices during the first half of the year. In defiance of the sub-$2 wellhead prices in April and May, the enormous storage surplus, and continued slide in gas-directed rig count, the Lower 48 gross natural gas production remained essentially unchanged in July from May, after the Gulf of Mexico volumes shut in in June due to Tropical Storm Debby came back online.
Production remained immune to the continued steep decline in the gas-directed rig count, which lost another 44 rigs, or 8%, during the month of July, according to Baker Hughes data.
The report highlights continued strength of the Marcellus shale production, which had been the driver behind the "Other States" volumes growth. The data indicate that the Marcellus production likely continued to increase in July, although at a slower rate than before, offsetting likely declines in other areas grouped under "Other States."
The report again shows no decline in Louisiana natural gas production which is dominated by volumes from the Haynesville shale (in my estimate, the field accounts for over two thirds of total Louisiana gas production).
The resilience of the Haynesville's production is remarkable given that during the preceding eighteen months, the field had lost more than 80% of its rig count and taking into consideration the steep hyperbolic nature of well production declines (in a recent note, I have discussed the possible factors behind the Haynesville's production stability).
The decline of natural gas production in Wyoming, which includes the prolific Pinedale and Jonah fields, is another distinct trend that remained unchanged in July.
Two months ago, I argued in several of my notes that the strong drop off in the natural gas rig count does not readily translate into the decline in production. Several factors contribute to the ostensible breakdown of the rig count and the production response relationship:
- A significant backlog of curtailed or shut in production from earlier in the year that will need to find its way to the market.
- A significant inventory of wells waiting on completion or pipeline connection, effectively creating "rigless" supply (the inventory is particularly high in the Marcellus, where infrastructure development continues to lag the HBP-driven drilling activity).
- Improving well performance and rig efficiency, as operators focus on drilling only the very best dry gas wells and the high-graded rig fleet and pad drilling contribute to higher drilling productivity.
- Rapid growth of liquids-rich and associated gas volumes that appears to be underestimated.
Perhaps the biggest misperception about the natural gas industry is the view that natural gas price can induce a production decline and cause a supply deficit. In reality, natural gas price, which is set in very liquid and transparent financial markets, has much less inertia than the industry-wide physical production and can move by a very substantial amount essentially in no time. It is the price that reacts to the perceived threat of the production surplus or deficit, sending an instantaneous signal to operators that induces a gradual adjustment. While the price can oscillate widely, the production should continue mostly on its "business as usual" course which requires that storage be well utilized by the end of each injection season.
This discussion of natural gas fundamentals bears relevance to natural gas producer stocks. My natural gas producer index includes:
- Chesapeake Energy (CHK)
- EnCana Corporation (ECA)
- Devon Energy (DVN)
- Southwestern Energy (SWN)
- Ultra Petroleum (UPL)
- EXCO Resources (XCO)
- WPX Energy (WPX)
- Cabot Oil & Gas (COG)
- Range Resources (RRC)
- QEP Resources (QEP)
- Quicksilver Resources (KWK)
- Forest Oil (FST)
- Bill Barrett (BBG)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.