USA Today
Bill Loveless
8/30/15
http://www.usatoday.com/story/money/columnist/2015/08/30/loveless-gas-production/71320550/
The U.S. is producing more natural gas than ever in 2015, despite low prices that make it increasingly difficult for companies to spend money on drilling. In fact, the government’s Energy Information Administration forecasts a 5.4% increase in output this year compared to 2014.
But new numbers from EIA suggest some trouble just ahead for gas production, especially in the resource-rich shale formations that have given rise to a U.S. renaissance in oil and gas production.
In its August “Drilling Productivity Report,” EIA forecasts that gas production will decline in all seven of the United States’ major shale regions in September, the first across-the-board slump in shale gas production ever recorded by the agency.
“We’re starting to see a slow-down,” said Lynn Westfall, director of EIA’s Office of Energy Markets and Financial Analysis, which compiles the report.
In May, production reached an all-time high of 45.6 billion cubic feet a day in the shale regions, including the Marcellus in Pennsylvania, the biggest gas field in the U.S. By September, the daily output is expected to fall to 44.9 billion cubic feet, according to EIA’s projections.
The other shale formations are Bakken in North Dakota, Eagle Ford in Texas, Haynesville in Louisiana and Texas, Niobrara in Colorado, Permian in Texas and Utica in Ohio.
EIA uses a relatively simple calculation for the report, comparing estimates of production from existing wells with that expected from newly drilled wells, based on the number of drilling rigs in operation. In its latest assessment, the agency concludes that output from new wells in shale formations will lag falloffs in production from older wells next month.
“Given the substantial drop in rig counts since the fourth quarter of 2014 in each of the (shale) regions and growing declines in production from legacy wells, productivity increases are less able to completely offset lower rig counts and legacy well declines,” the report explains.
That said, the decline doesn’t appear so great as to upset EIA’s projections for gas production in the U.S. as a whole, including gas from other, conventional onshore wells and wells in the Gulf of Mexico. In fact, the agency in its “Short Term Energy Outlook” for August predicted that total U.S. gas production would climb by 4 billion cubic feet per day in 2015 compared to 2014, reaching 78.7 billion cubic feet per day, with improvements in drilling efficiency offsetting low prices.
But that growth tapers off in 2016, with total U.S. gas production rising 1.8 billion cubic feet per day, for a daily total of 80.5 billion cubic feet.
“Production in the first half of 2015 was well above the first half of 2014, so even if we have declining production now, just averaging over the year will give you an increase in 2015 over 2014,” Westfall said in an interview. “In 2016, you’ll start seeing the price effect.”
The Henry Hub spot price for gas – the U.S. benchmark for the commodity – was $2.63 per million British thermal units on Thursday, down 34.5% from the same day one year ago. At that time, the price was $4.02.
Westfall cautions that the drilling report, unlike EIA’s other market analyses, doesn’t take into account economic factors, such as changes in the price of gas, or new infrastructure to carry gas from shale formations.
For example, the 1,698-mile Rockies Express Pipeline, originally built to carry gas east from Colorado and Wyoming, just recently began shipping gas west from the Marcellus and Utica shale formations, opening new markets and potentially providing higher prices for producers in those regions.
And with near-record levels of inventory, the U.S. gas industry will head into the winter heating season with more than enough supply to meet demand.
But discrepancies bear scrutiny, Westfall says.
“The purpose of the report is more to point out those inflection points, when we do see things start to change direction,” he said. “It’s very good for that. But beyond a couple of months, anything can happen.”
Bill Loveless — @bill_loveless on Twitter — is a veteran energy journalist and television commentator in Washington. He is a former host of the TV program Platts Energy Week.