On Friday, the Energy Information Administration released U.S. natural gas production statistics for the month of August. The report shows remarkably little change from the previous several months and re-confirms the earlier established trends.
The Lower 48 gross natural gas withdrawals remained essentially unchanged from the previous month. However, if the production shut-ins due to Hurricane Isaac are taken into account, the production would have shown a modest month-on-month increase.
The report highlights continued strength of the Marcellus shale production, which has been the driver behind the "Other States" volumes growth. The data indicate that the Marcellus production likely continued to increase in August despite the persistent infrastructure limitations.
The report again shows almost no decline in Louisiana natural gas production (the month-on-month contraction was mostly due to the coastal production shut-ins due to Hurricane Isaac). Louisiana gas production is dominated by volumes from the Haynesville shale. The stability of the Haynesville volumes so far confirms the thesis that the field-wide base decline rate is lower than is broadly perceived.
The resilience of the Haynesville's production is remarkable given that during the preceding 18 months, the field had lost more than 80% of its rig count.
The Wyoming natural gas production continued on its 10%+ annualized decline trajectory. The data indicates that the Rockies remain a swing production region (against the common belief that several other fields, including the Haynesville and Fayetteville, will be the first to experience production declines in a low natural gas price environment).
While the EIA data is reported with a two month lag and should not come as a big surprise, it is nonetheless important as a validation of assumptions used in many gas supply models.
It is important to note that the flat production trend that continued in August masks a substantial supply reserve, which remains "compressed" in the system in the form of the massive well inventory and restricted production flow. The exceptionally high storage level at the beginning of the injection season this year has kept the pace of production growth under restraint. The sub-economic prices and infrastructure limitations have also played a big role. It would be incorrect to anticipate an imminent production decline in response to the slide in the gas-directed rig count, which has continued unabated to date. It may take some time -- at least several months -- for the "hidden" supply to be fully absorbed. Moreover, as the storage-driven limitation on growth is now out of the way until next summer, the production figures may show moderate growth in the coming months before reaching a plateau or even declining later in 2013.
This discussion is fundamentally relevant for natural gas (NYSEARCA:UNG) and the natural gas producer stocks. My natural gas producer index includes:
- Chesapeake Energy (NYSE:CHK)
- EnCana Corporation (NYSE:ECA)
- Devon Energy (NYSE:DVN)
- Southwestern Energy (NYSE:SWN)
- Ultra Petroleum (NYSE:UPL)
- EXCO Resources (NYSE:XCO)
- WPX Energy (NYSE:WPX)
- Cabot Oil & Gas (NYSE:COG)
- Range Resources (NYSE:RRC)
- QEP Resources (NYSE:QEP)
- Quicksilver Resources (NYSE:KWK)
- Forest Oil (NYSE:FST)
- Bill Barrett (NYSE:BBG)