Rusty Braziel, RBN Energy
Our thoughts and prayers are with the families and friends of those who lost their lives to Hurricane Sandy and to those dealing with the aftermath of the storm.
On Monday as record setting Hurricane Sandy was plowing into the East Coast, another record was quietly being broken. That record was all time US natural gas production. According to Bentek numbers it increased to 64.9 Bcf/d (total natural gas production less NGLs and other shrinkage, lower 48 states).
It is kind of spooky that this occurred just before Halloween.That’s because back in August we noted that Halloween could be an important date for natural gas production. It turns out that is true, but not for the reasons we thought at the time. So today we return to our original analysis to see what has changed and examine the consequences for the upcoming natural gas heating season.
Friday, August 13th, 2012
We are not your typical energy prognosticators at RBN. We don’t make guesses about weekly EIA storage numbers, we don’t have a price deck, and we don’t publish market forecast reports. But you can’t be in the energy markets consulting business without predictions of future supply, demand, and prices for the gas, crude and NGL markets. So we think a lot about these things. And every once in a while we succumb to the temptation to look into the crystal ball here in the blogosphere. So it was back on August 13, 2012, when in the heat of the moment we violated the cardinal rule of all consulting. We talked about an outlook for a specific day - Halloween 2012 in Natural Gas Rig Count, Production and Productivity: Kinda Spooky. Now Halloween 2012 is upon us, so we’ll just violate one more cardinal rule of consulting. We’ll look back at what we said, and compare that to what actually happened.
Here are the cliff notes for that blog.
- The natural gas rig count is down dramatically, but production seems to be holding flat. No sign of a decline.
- One of the key reasons is a 3X improvement in the productivity of individual rigs. We looked at the productivity results for Southwest Energy as an example.
- Natural gas production appears to be on a flat trajectory from Q4 2011 to August 2012. The average production rate from January 2012 to August 2012 was 63.7 Bcf/d. If you extend that flat trend on out through the remainder of 2012 it would intersect the 2011 trend line on Halloween 2012.
- At that point, year-on-year production would no longer be increasing. Instead year-on-year would show a decline. It’s just a statistic. But we hypothesized that it would be news whenever the media got ahold of that statistic. [Headline - Natural Gas Production Declines! You can see it now.]
- We also cautioned that real production declines could soon become visible if the falling rig count finally overwhelmed productivity improvements.
So Much for the Crystal Ball
Here’s what really happened. The natural gas rig count continued to fall – see Graph #1. In August, the number was 495. Last week it was 416, down 79 gas rigs. That’s a pretty big number and shows no sign of reversing (blue circle). So did it finally start to show up in the production numbers? Based on Graph #2 it doesn’t much look like it. These are Bentek Cell Model numbers showing daily production from January 2010 until today. Obviously the growth in 2010 and most of 2011 was huge. It certainly flattened out in late 2012, and has not moved the needle much this year. But look there inside the blue circle in Graph #2. What’s that happening over the last few weeks? Guess we better drill down into the numbers to see what is going on.
In Graph #3 we zero in on the past couple of years of natural gas production, and we do one more thing. We split out production in the Northeast (primarily Marcellus) versus everything else. We first went through this exercise back in June in The Marcellus Changes Everything: Gas Flows, Transport Contracts, Basis. The green line on this graph is total US lower 48 production, excluding the Northeast – from the first of 2011 until now measured on the left axis. Note that it has been declining for the past twelve months – until the last few days. The red line is the Northeast. The units are the same, but the level is indicated on the right axis. Northeast production volumes have grown from 4 Bcf/d at the first of 2011 to more than 9 Bcf/d today, and the volumes are still holding in there. In effect, the Marcellus has been making up for the net decline in the rest of the US for the past year.
As we noted in Keep Calm and Carry on Drilling, this phenomenon is partially due to a large inventory of drilled but uncompleted wells in the Northeastern part of Pennsylvania (dry Marcellus) now being worked off as new infrastructure is completed. Still more new production is due to increasing drilling activity in the southwestern part of Pennsylvania, in West Virginia and now Ohio for wet - or high BTU - Marcellus gas.
But what’s this bump that has been happening in the ‘Everything Else’ line? That’s what pushed the number to the new record of 64.9 Bcf/d. Drilling down into the Bentek cell numbers the answer is quite apparent. It is mostly Texas. Yup. Eagle Ford. Permian. Other volumes here and there. This is going to be a trend worth watching.
The Halloween Trajectory
As the graphs below clearly show, our Halloween trajectory theory from Friday, August 13th is in shambles. The natural gas rig count continued to decline, but production is up. Again. Graph #4 is a redo of what we showed in the August blog. It is somewhat hard to see what is going on, so Graph #5 is a blowup of the past three months. The message is clear. After the recovery from Isaac, production has moved UP relative to last year.
So at least at this point we won’t need to worry about an overzealous media reporting on lower year-on-year production. And presumably the decline in rig count has yet to overwhelm productivity improvements. These trends are still spooky, but not for the reasons we were expecting.
What does it all Mean?
We are not about to be pulled back into the forecasting mode. But this does seem to say something about the coming heating season. There is a lot of gas out there. If it gets cold and the price runs up, that will just motivate those darned Marcellus and Eagle Ford producers to drill more. Inventories are still in the stratosphere, and Sandy will certainly put a big dent into demand for the next few days. Gas producers better hope those power generators keep on burning large volumes of gas, otherwise they might find the winter no more fun than this summer was.
About the author
E. Russell "Rusty" Braziel is President & Principal Energy Markets Consultant for RBN Energy. RBN provides energy market advisory services specializing in strategy, acquisitions and divestures. He was previously managing director of Bentek Energy LLC. His background in energy marketing, trading,and data services includes 20 years with Texaco, serving as vice president of natural gas marketing and trading and manager of NGL supply. Subsequently, he was vice president of business development for The Williams Companies. Braziel founded and served as president and CEO of Altra Energy Technologies. He also was vice president, NGL marketing and operations for Link Energy LLC. He is on the board of directors of the North American Energy Standards Board and is the author of numerous articles in industry publications.