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Gas Production in the U.S. at a Standstill?

Regional Production Analysis Part 1 – Marcellus

May 21, 2015 | By Charles Nevle

Lower 48 wellhead production grew 6.6 billion cubic feet per day (Bcf/d) in 2014. Since December, production has declined 0.6 Bcf/d. In this issue of PointLogic Energy’s Get the Point we begin to take stock of the current hydrocarbon production environment and what it means for natural gas production growth in the near future.

Headlines are abuzz with the bellwethers of this market. Oil prices have retreated from above $100 per barrel (bbl) to the mid $40s and has recently climbed back to $60/bbl. Rig counts have fallen off a cliff, dropping by 50% since the peak in September 2014. Meanwhile, the traditional shock absorbers for volatile oil prices, OPEC in general and Saudi Arabia in particular, have made it clear that they do not intend to reduce production in order to stabilize prices, but are rather increasing production in a battle for market share with the U.S.

Background – How We Got Here

Since 2006 U.S. natural gas production has been on an unmitigated upward climb. Behind this growth lies the ingenuity of an industry, which in the early years of the current century faced declining production from old workhorse plays both on and offshore. New pipelines like Rockies Express were built allowing expansion of Rocky Mountain region production while a supply constrained market drove prices to a level that incentivized the development of shale plays in the Barnett, Haynesville and Fayetteville. Lessons learned from the development of these plays led to exploration of other shale plays. Horizontal drilling and hydraulic fracturing drove well productivity to higher and higher levels while also reducing unit costs.

Lower 48 Wellhead Production

As the fruits of this new production arrived to market, the economics switched from a supply constrained market to a demand constrained market resulting in plummeting gas prices. The industry then showed another burst of innovation, adapting the methods used for gas production to much more lucrative oil and natural gas liquids (NGLs) production. As a result, efforts were redirected away from dry gas plays towards oil and liquids-rich plays such as the Eagle Ford, Permian, Utica, Anadarko and others. With oil prices high, the economics in many of these regions were so good from oil and NGLS that gas essentially became a byproduct. As a result, the economics of gas production became less reliant on the price of gas and more reliant on the price of oil.

This reality of a gas market intertwined with oil prices has become abundantly clear as we enter the tenth year of gas production growth in the U.S. While average 2015 production through May is higher than 2014 average annual production, monthly average production has yet to best wellhead production of 80.1 Bcf/d observed by PointLogic in December 2014.

Lower 48 Wellhead Production Growth

Production Stagnates

So, what does all of this mean for U.S. gas production? Well, as noted in the above graph, gas production so far this year has yet to climb above Dec 2014 levels. To understand what may be in store for the near future let’s take a look at what drove the strong production growth in 2014 and what is happening so far in 2015.

Based on PointLogic’s pipeline flow based Gas Processing Plant Database, Wellhead production is averaging 79.5 Bcf/d to date in May 2015.

May 2015 Wellhead Gas Production

The chart below shows that wellhead production rose by 6.6 Bcf/d in 2014. Growth was wide spread throughout many regions with the Northeast (Marcellus), East Central (Ohio), Permian, Gulf Coast South (Eagle Ford) and South Central (West Virginia Marcellus) providing the bulk of the growth, while the only significant decline was in the Gulf Coast North (Haynesville).

2014 Wellhead Production Growth by Region

The chart below takes the same kind of look, but at the activity through the first five months of 2015.

2015 Year to Date Production Growth by Region

Clearly these graphs document a much different production environment so far this year. Only two of the seven growth regions from last year are showing real growth and even that is at a much lower annualized pace. Furthermore, while it took a full year for the Gulf Coast North region to drop 0.5 Bcf/d in 2014, we have already achieved that drop in the first five months of this year.

To understand what may be in store going forward we will walk through the major growth regions from last year and see what’s happening there now. This issue of Get the Point will focus on the Northeast region of the country, which encompasses production in the Pennsylvania portion of the Marcellus. Upcoming issues will dive into the other producing regions.

First, a bit about PointLogic’s production methodology

Production data is reported by states on different schedules and is almost always on a three month lag, with some states taking considerably longer to report. For instance West Virginia reports only once a year and that information is released in August for the previous year’s production. Even states that report data often report incomplete data, for example Pennsylvania reports unconventional volumes monthly, but only reports conventional production volumes on an annual basis. 

For these reasons, in order to estimate production volumes for incomplete and yet unreported months by state agencies through the current day, PointLogic utilizes its database of nominated pipeline meter scrapes – data compiled from the operational capacity postings of interstate pipeline Electronic Bulletin Boards (EBB’s) under mandate of the Federal Energy Regulatory Commission (FERC). PointLogic analyzes these meter points to determine which points represent production volumes and then looks on a regional basis at the relationship of point level data compiled from the EBB’s to actual state reported production to create regional production estimate models. These estimated volumes are trued up to actual volumes as state production volumes become available.

Northeast Production

The production growth measured in the Northeast region in 2014 of 2.0 Bcf/d was of course driven by Pennsylvania gas production in Marcellus, as Ohio production is captured in the East Central Region, and West Virginia is in the South Central region. Thus far in 2015, production in the Northeast region has declined by 0.8 Bcf/d. PointLogic’s Rig Count Report for April shows that 49 rigs are operating in Pennsylvania, down from an average of 55 in 2014.  Production flow data for Pennsylvania, or any other state, can be accessed on the PointLogic website by navigating to the State & Hub Pipeline Flows section of the Pipeline Module, selecting the state from the drop down menu and filtering on Processing (GPP) and Supply (SUP points) as shown below.

PointLogic Energy Pipeline Module

By compiling point flow volumes for Pennsylvania (Pa.), we find that about 55% of the production classified flow growth from Pa. is in counties in the southwest portion of the state and about 40% from the northern portion. Where it gets interesting is that so far this year, the southwest county flow volumes are up 15% or about 0.4 Bcf/d while the northern counties are down 13% or 1.0 Bcf/d. The southwest production volumes are typically wet gas production whose economics are driven in large part by NGL pricing while northern Pa. gas production is quite dry and driven, of course, by gas prices with no uplift for the NGL portion of the hydrocarbon stream.

For northern Pa. declines, three counties make up the lion’s share of the decline in flows, Lycoming, Luzerne, and Bradford. The other two sizeable counties in the region, Susquehanna and Tioga, actually show an increase in flows.

North Pennsylvania Production Flows

Drilling down into Lycoming County the supply classified flows are all on Transco pipeline with the largest declines at the Miller Hill, Guinter, and Tombs Run points. PointLogic has discussed pipeline maintenance taking place in the Northeast, specifically on Transco, which has contributed to the production declines.

To further asses overall production declines, the next step is to determine how much of the decrease is a result of maintenance, which is a temporary event short in duration, as opposed to production declines which are more sustainable. Below we identify which declines in this county we believe are maintenance related and which are not.

Maintenance Related Production Declines

To determine which drops are maintenance and which are likely not, pipeline notice data is helpful and can be found on the Notices page on the Pipeline Module via the PointLogic website in conjunction with point specific flow data. For instance, below are point details from the PointLogic website which can be accessed by simply clicking on the point name.

PointLogic Energy Pipeline Module Notices

PointLogic Energy Pipeline Module Notices

In the Miller Hill flow data, a quick drop in flows that began on April 30 is evident when flows dropped from 147 MMcf/d the previous day to 72 MMcf/d. This kind of drop is generally indicative of an event, such as a maintenance outage. In contrast, the decline at Tombs Run has been more gradual and is indicative of non-maintenance related declines.  Using this methodology we estimate that about half of the declines in supply flows in Lycoming County are maintenance related and about half appear to be more sustained declines.

An analysis of Luzerne, Greene, and Bradford counties indicated that a decline in flows in these counties appears to be non-maintenance related. Of the 1 Bcf/d reduced supply flows so far this year in northern Pa., less than half appear to be maintenance related.

Declining production in the region is not all that surprising when you take a look at what is happening with regional prices. Market Hub prices for Pennsylvania dry gas production have been the worst in the country. Dominion South is averaging $1.56 per million British Thermal Unit (MMBtu) so far this month which is $1.85/MMBtu lower than May 2014.  Certainly the overall tide is down with Henry Hub averaging just $2.79/MMBtu this month, but for producers with options it is understandable why they may be less incentivized to sell gas in this market.

Producers Announce Production Curtailments

Analyzing production data from northeast Pa., six producers make up over 75% of the production in the region, the largest of which is Chesapeake. Based on state reported wellhead production, Chesapeake produced just over an average of 2.1 Bcf/d in northeast Pa. in 2014. Preliminary state data for January and February indicates average production for Chesapeake, currently operating just one rig in the region, is down nearly 290 million cubic feet per day (MMcf/d) or 13% from December. In fact, in an investor presentation released earlier this month Chesapeake made clear their strategy of curtailing northern Marcellus production while increasing development of their holdings in the Mississippian Lime formation along the Oklahoma/Kansas border.

2014 Top Northeast Pennsylvania Producers

The second largest producer, Cabot, in a presentation from May 13 indicated that their break even cost in northeast Pa. is $1.79/MMBtu. Preliminary data for January and February indicates Cabot’s production is declining and they have indicated that production levels will “ultimately be dictated by price realizations and potential curtailments.” It was stated that they intend to average just 3.5 rigs in the region compared to an average of six rigs in 2014. One item to note about Cabot compared to Chesapeake is Cabot’s comparatively lower ability to optimize a geographic footprint. Cabot holds interest in just two plays in their portfolio (Marcellus and Eagle Ford) compared to Chesapeake which holds acreage in numerous plays including Marcellus, Eagle Ford, Haynesville, Bossier, Mississippian Lime, Utica, and the Powder River Basin.

Conclusion

The production juggernaut that has been northeast Pa. has for now apparently hit a wall. As recently as 2010 average annual northeast Pa. production was less than 1 Bcf/d. By December 2014 average monthly wellhead production from this region peaked to nearly 8.8 Bcf/d and averaged 7.8 Bcf/d for the year.

Some of the production decline seen this year is certainly due to maintenance, but much of it is not. As observed in the Haynesville and Fayetteville, it is the price of gas, not the ability to produce gas, which is slowing production. The prospects for northeast Pa. hinge on the when prices improve in the region. As discussed in other Get the Point articles, the Northeast is a region is at nexus, transitioning from an inflow region to an outflow region. The days of Northeast production growth displacing inflows from other regions are by and large gone, now incremental production will have to find a home outside the region, especially in the summer when local demand is lacking. 

Earlier Get the Point articles have discussed the numerous projects that are on the board to move gas out of the Northeast to other markets, but have also pointed out that these are not demand growth markets that these pipes aim to serve, at least not in the near term. What increasing Northeast gas production is faced with is gas on gas competition and no longer is it competing for this market on home turf, now it is a road show and this gas will have to compete with the same gas plays it was competing with on a displacement basis, but now in these other basin’s home markets.

Until significant demand growth materializes either in the form of strong power generation demand akin to what occurred in 2012 or LNG export projects, northeast Pa. prices are likely going to be challenged and as a result regional production growth will be limited. Producers have higher return options in NGL and oil focused plays which will, in a gas demand constrained market, challenge dry gas producers.

Another challenge to upward price movement in the region will be the large and increasing inventory of drilled but uncompleted wells that can quickly supply large amounts of gas whenever the right pricing signals begin to materialize. 

In upcoming Get the Point articles analysis will be done on other producing regions to determine what is driving current production dynamics and provide a viewpoint on where production levels are headed in the near future.  Stay tuned!

If you have questions or comments on this article please give me a shout at 713.819.7474 or send me an email at cnevle@pointlogicenergy.com.

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