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Other Side of the Peak

2016 Natural Gas Production Guidance

January 13, 2016 | By Charles Nevle

In last week’s Get The Point posting, my colleague Warren Waite did an excellent writeup surveying the activity in the crude oil, natural gas and natural gas liquids markets for 2015 and what the current environment of oversupply and bloated inventories portends for the coming year.

In this week’s edition, we take a closer look at the trends over the past couple of years in Lower 48 natural gas production at a more granular level and provide a forward-looking view on how things could play out this year.

A very brief description of our regional methodology before we get into the heart of the matter. PointLogic breaks the Lower 48 states into 92 Producing Areas. Producing Areas are an aggregation of counties and thus can be thought of as geographical regions. The Gulf of Mexico is also treated as one Producing Area and includes state and federal offshore production. Producing Areas then roll up into our seven PointLogic Regions.

The analysis presented below will leverage off these Regions and Producing Areas.

PointLogic Regions

L48 Dry Gas Production by Region

Lower 48 Dry Production by Region (Bcf/d)

Looking at the table above, one could get the impression that 2015 annual production growth was just a slightly muted version of 2014, but that really misses the point. What the market witnessed in 2014 was rapid growth, particularly in the fourth quarter, due to a combination of pipeline expansion and a generally healthy price environment prompted by sufficient demand and marginally depleted levels of natural gas storage inventory in the ground.   

Conversely, 2015 growth was driven by consolidation and the completion of much of the drilling initiated at the tail end of 2014. Production growth was much more concentrated in the Northeast region of the country (which still has the benefit of pipeline expansion), but as we see in Figure 1, this growth is slowly receding. To really get at the core of what is happening with production now and in 2016, we need to dig deeper into the regions and see what trends are occurring at the Producing Area level.

Northeast Region

Northeast Dry Production

The Northeast is now the most prolific of our seven producing regions, having surpassed Texas in December 2015. However, as the chart above depicts, 2015 did not see significant growth above end of 2014 levels until late in the year. Depressed pricing incentivized producers to wait for higher winter demand, coupled with the in-service of several pipeline projects, promised to provide a better economic environment.

Unfortunately for the unhedged producer, demand for the most part was a no-show, and Appalachian prices tumbled to record lows. As the chart below shows, the only Producing Area with continued unabated growth is the Utica.

Northeast Dry Production

Late year in-service projects such as the Broad Run projects on Tennessee Gas Pipeline and Columbia Gas Pipeline, aided West Virginia as well as southern Pennsylvania and southwestern Pennsylvania production, while the phased completion of Transco’s Leidy Southeast Expansion Project gave northeast Pennsylvania dry (NE PA-Dry) a boost. Producers have been very vocal as to their intention to delay production increases until their gas can be sold at better pricing locations than Dominion South and Tennessee Zone 4.

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Antero Resources’ ship came in with Broad Run, while Cabot, the largest producer in NE PA-Dry, is waiting on the Constitution Pipeline, which has a scheduled in service of November 2016. (Note that Constitution asked FERC for permission to start clearing trees from its proposed path beginning on Jan. 22, but public interest groups in New York are asking FERC to deny the request and also have reached out to State Attorney General Eric Schneiderman to intervene.)

In total, our Pipeline Projects database is tracking nearly 15 Bcf/d of projects with in-service dates in 2016. While there is only slight risk that some of the projects might not come to fruition, the larger concern is will they come online when expected. For example, the delayed 2 Bcf/d Utica Ohio River Project should go into full in-service soon. There were also a few projects that were set to come online in November of last year that were delayed for a short duration because production by committed anchor shippers was not ready to tie in.  

A second question is whether there will be enough domestic demand to absorb any new supplies. Prices and storage levels at the time in service begins will help dictate the supply-demand balance.

We expect Northeast gas dry production to average around 21.2 Bcf/d for 2016, which is an increase of just under 1 Bcf/d over current levels and about 2.1 Bcf/d higher than 2015 average production.

Texas Region

Texas Dry Production

Texas gas production has a lot of moving pieces. There are sizeable Production Areas in the Lone Star State, but they are very different from each other. The Gulf Coast and the Barnett offer stable but declining production. Younger plays such as the Eagle Ford have been strong sources of growth to offset declines elsewhere. Mature but reinvigorated basins like the Permian have seen their fortunes turn up, after it was once thought production growth was played out. 

Texas has certainly shown growth, but that growth is based on the success of Eagle Ford and Permian (for more on the techniques and economics of what has spawned the production growth of recent years, see our Gas Production Analysis series). Eagle Ford’s production peaked in March 2015 and has come off nearly 0.5 Bcf/d since that time. This has left Permian to be the standard bearer for Texas production growth, which it was doing effectively until the explosion of the Ramsey Processing Plant in Reeves County on Dec. 3, 2015. This took about 250 MMcf/d of gas off the market. That setback was followed up by the recent freeze-offs, which took off about another 800 MMcf/d. With most of the gas freeze-offs in the Permian ended, we are likely to see near-term return to growth in Permian production. However, in the long-term, further growth in production will be primarily driven by oil economics; if oil prices continue to drop, even growth in the Permian will become challenged.

Texas Production

Permian growth is not likely sufficient to compensate for the losses we see occurring throughout 2016 in the other producing areas in the state. Overall, we expect Texas to produce about 19.0 Bcf/d of dry gas in 2016, about 0.8 Bcf/d less than 2015 average production.

Rockies Region

Rockies Dry Production

The Rockies region has, surprisingly, been holding its own. Sure, if Bakken is removed the Rockies has been in a decline, but given the dramatic changes occurring in the Northeast and on Rockies Express Pipeline in particular, there were plenty of reasons to think the region would have a more painful stay in the woodshed. Three Producing Areas have allowed the region to grow – the Bakken of course, but also the Piceance and Green River-WY.

The one that is the most surprising in Green River-WY. This is an area that had been in decline for quite some time until producers, including Ultra Petroleum and QEP Resources, began aggressively drilling in the Pinedale/Jonah field. The Pinedale/Jonah play is a liquids-rich gas play, and although neither operator provides a lot of guidance for 2016, according to DrillingInfo, Ultra Petroleum backed down the number of rigs it is operating in the region from four to two in November 2015. QEP Resources, on the other hand, is holding steady at three vertical rigs. 

Rockies Dry Production

Overall, as the chart above depicts, the regions that had been showing growth have really flat-lined over the past five months or so. Given the price environment, plus the challenges for markets from the Northeast, Texas and Canada, we expect production for the overall Rockies region to decline about 0.3 Bcf/d in 2016 despite moderate growth in the Bakken.

According to the North Dakota Pipeline Authority, about 400 MMcf/d of new processing plant capacity is coming on line in 2016. With over 200 MMcf/d of gas being flared in the Bakken, an increase in gas production in an environment of new midstream infrastructure is somewhat insulated from a potential decline in crude directed production.

Mid-Con Region

Mid-Con Region Dry Production

The Mid-Con has not been growing much, but despite the freeze-off driven declines seen recently, it has been increasing. This is a bit surprising, given the 2.7 Bcf/d decline of the region’s big play – Fayetteville. The increases in 2015 were really constrained to the Mississippian and the Cana-Woodford. Average 2015 dry production for the Mid-Con rose 0.2 Bcf/d in 2015. Cana-Woodford increased 0.3 Bcf/d over this period, and the Mississippian grew 0.2 Bcf/d.  

Mid-Con Dry Production

Due to the way the State of Oklahoma reports its production data, analysts have a challenge discerning exactly what is taking place and which producers are behind it, but one thing is clear – Continental Resources is bucking the trend and has been increasing production in the SCOOP and STACK plays that are contained with the Cana-Woodford Producing Area. Based on Continental Resources’ latest investor release dated Nov. 4, 2015, oil production in Oklahoma is expected to increase a whopping 60% over 2015 volumes. 

Based on our analysis of their production, we expect that equates to an increase in gas volumes at least equivalent to the oil increase projection. The big driver for Continental Resources has been oil production, not gas. Thus, we believe the prospect for continued growth in the Cana-Woodford Producing Area is very much tied to the prospects for oil prices. Based on our analysis, Continental Resources is currently operating 15 rigs in Oklahoma, down from about 20 in 2014. Given the rapid decline in rigs we’ve seen elsewhere, this is not a huge decrease and could be offset by increases in drilling efficiencies. Like many producers, Continental has been doing more with less while also increasing the number of drilled but uncompleted wells. 

Looking towards 2016, we expect Mid-Con production to decline slightly, about 0.2 Bcf/d, as continued gains in Oklahoma offset losses in Arkansas. A strong downturn in oil prices could certainly limit production activity in Oklahoma and result in lower regional production.

Southeast Region

Southeast Region Dry Production

The declines in the Southeast Region are, of course, all about Haynesville. There are lots of reasons to be optimistic about the Haynesville play:

  • outstanding IP rates
  • relatively inexpensive recompletion uplift potential
  • lots of existing pipeline infrastructure
  • proximity to a growing LNG export market center

However, there is one big overriding negative – the juggernaut that is Northeast production growth and the low natural gas prices that have resulted from this oversupplied market. (Ok, maybe that is two negatives, but these two negatives don’t make a positive, and our production outlook for the Southeast is not positive either.)

The region’s largest producer, Chesapeake, dropped production by 245 MMcf/d, or 22%, between June and October of 2015, according to data from the State of Louisiana. Combined, the top 10 Haynesville producers reduced production by over 9% between June and September, the most recent monthly data available. Overall, we are estimating a 0.5 Bcf/d decrease in production in 2016 vs. 2015 for this region. 

Western Region

Western Region Dry Production

The Western Region story is all about growth in New Mexico’s share of the Permian; PointLogic Energy predicts that this will outpace declines in other regions – most notably the San Juan-NM Producing Area.

As with many of the other regions, the fate of continued growth in the Permian-NM depends on high enough oil prices to keep producers here healthy and active. According to DrillingInfo, the rig count for the Permian in New Mexico stood at 91 at the end of 2014 and is now down to 28. New well starts have declined from about 100 per month to around 40 currently. The most recent downturn correlates with the late December freeze-off, so we expect these volumes to return by the end of February at the latest (and much has already come back on line).  

Western Dry Production

Overall, we expect 2016 to see the Western Region post a year-on-year loss of just under 0.2 Bcf/d, as the downward momentum is met with lower production growth in the Permian-NM. 

Gulf of Mexico

Change is the name of the game in the Gulf of Mexico producing region: 2015 was the first year since 2009 that the Gulf posted a year-on-year production increase. But it was an increase by the thinnest of margins, and this could certainly flip as revised state data comes out over the coming months. Early in the year, we saw new infrastructure come online as new oil-directed deepwater drilling platforms were tied in. The Gulf of Mexico saw dry production exceed 4 Bcf/d after starting the year at just 3.7 Bcf/d. This encouraged hopes that a renaissance in Gulf production was at hand, but it was not to be as production has languished back down to 3.6 Bcf/d. 

It is difficult to say what will happen in the Gulf over the coming year. During the period of high oil prices, there were significant investments made in offshore production that could bear fruit in 2016, but we all know that the current pricing environment does not encourage adding a lot of new production. So, for 2016 our thinking is that the Gulf will see a very slight decline in production of about 0.1 Bcf/d.

Bringing It All Together

Summing up our regional outlooks, we expect 2016 U.S. production to be about flat to 2015, very close to 73 Bcf/d. Dry production peaked in September 2014 at 74.0 Bcf/d, and we don’t expect any month to exceed that total. The big limit on production growth will likely be the looming end of summer storage inventory balance, which we think has a realistic limit of about 4.1 Tcf. It should be noted that the most recent downturn in both crude and gas prices has definitely already had an impact on production, which should, barring an uncooperative summer demand market, preclude a test of that limit. 

Freeze-offs have helped take some pressure off the market, and no longer are we expecting to end this winter with 2.5 Tcf or more of gas in the ground. But the exit balance will still be plenty high, and the challenge will be on the power generation market to go above and beyond the record levels of gas burns seen in 2015 to help balance the market. Weather this summer will, of course, have a lot to say about the prospects for these increased burns. 

Thus far, winter 2015-2016 has been anything but cooperative for gas prices. Of course oil prices, as mentioned many times in this article, will also play a decisive role in gas production.

Suffice it to say that this is shaping up to be a very interesting year -- and interesting sometimes is not pretty. One thing you can count on is that we will be staying on top of the developments and keeping you up to date as we march into this challenging year.

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