America's Top Shale Gas Basin In Decline

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Includes: BOIL, DCNG, DGAZ, GAZ, KOLD, UGAZ, UNG, UNL
by: Oilprice

Summary

Massive oversupply continues to haunt natural gas markets.

Some companies choke back on production instead of selling what they can.

Decline in Marcellus is bad news for the state of Pennsylvania.

By Nick Cunningham of Oilprice.com

The natural gas drilling frenzy is grinding to a halt, as the industry struggles with excess supply.

Natural gas prices have plunged to their lowest levels in more than a decade this month, dipping below $1.80 per million Btu (MMBtu).

The shale gas revolution is an old story at this point, one that everyone is familiar with. But the revolution never really ended, even though the media moved on to focus on the tight oil boom. Natural gas production continued to rise over the past decade, reaching record heights in 2015.

However, demand has not kept up, despite the rise in the natural gas power burn. Gas-fired power plants are replacing coal for electricity generation, but not quickly enough to soak up all of the extra supply coming out of U.S. shale.

Natural gas storage levels, meanwhile, are overflowing due to the unseasonably warm weather across much of the United States. For natural gas producers, this is a nightmare situation with Henry Hub prices falling to levels that are extremely difficult to turn a profit. The low prices forced the iconic Chesapeake Energy (NYSE:CHK), the U.S.'s second largest natural gas producer, into a debt swap to push out maturity dates for its debt. Chesapeake's stock price has plunged 80 percent over the past year, and has dropped by 20 percent since the beginning of December.

There is a bit of hope for the market, as natural gas prices surged by 8 percent on December 21 because colder weather is starting to appear over the horizon, pointing to higher demand. But that will only nip around the edges of the nation's glut in supply.

There is another bit of positive news for natural gas prices, which comes from new predictions of production declines from the EIA. The forward-looking predictions for shale production in the EIA's Drilling Productivity Report - which show production declining in major shale areas - are not as reliable as the retrospective monthly production figures, which point to rising output through at least September.

Nevertheless, the EIA's best guess in its latest DPR report is that natural gas output is already on the decline. The EIA sees output from the massive Marcellus Shale dropping by 213 million cubic feet per day (mcf/d) in January 2016 from a month earlier. The Eagle Ford, which is leading losses in oil as well, should see output fall by around 172 mcf/d in January.

The glut in gas has crashed prices, which, in turn, has forced a dramatic pullback in drilling. Reuters recently reported that new drilling permits for the Marcellus declined to just 68 in October, which was a dip from the 76 issued in September. But, those figures are vastly down from the peak of 600 per month routinely seen at the height of drilling five years ago.

Some companies are even "choking back" production instead of selling what they can. "It is better to choke back than to sell into this market," Matt Henderson, a spokesman for Inflection Energy, told Reuters. Inflection Energy has reduced production from 50 to 70 percent of its gas wells. Other companies in the Marcellus are doing the same.

Prices are so low that drillers are shutting in production, a once unfathomable development. This suggests that prices could be at an absolute bottom. Still, that is not to say that prices will rebound substantially anytime soon. The supply overhang will likely linger with storage levels at such highs. "There is just too much gas," Justin Kastner of Global Land Partners, a company that finds oil and gas leases for drillers, told Reuters. "I expect to see a downturn for the next two years."

The drilling slowdown is hurting the economy in and around the core of the Marcellus Shale region in Pennsylvania. Foreclosures in Lycoming County, PA, hit their highest levels in almost a decade in the first six months of this year. Parts of Pennsylvania enjoyed the boom times from the shale gas revolution a few years ago, but now they are suffering from the bust.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.