Slower-than-usual rig count growth, fewer uncompleted wells and a shrinking coal generation fleet are contributing to an atypical natural gas market recovery, according to analysts with ConocoPhillips.
At the LDC Gas Forum Southeast in Savannah, GA, on Monday, ConocoPhillips’ Matt Henderson, a senior market analyst, said the industry had entered “a bit of a new market.”
To illustrate, he pointed out that exploration and production (E&P) companies added rigs at a slower rate during the 2020-2021 price recovery than in the previous rebound in 2016-2017. Rig additions for the most recent period totaled only 246 units, compared to 497 units in 2016-2017, he noted, acknowledging that fleetwide rig efficiency improvements could contribute to the slower pace.
“And this is despite the fact that the run up in prices that we saw this time around has been a lot stronger for both gas and crude,” Henderson said.
As of last Friday, Baker Hughes Co. (BKR) counted 524 oil-directed and 137 gas-directed rigs across the United States.
Why Aren’t Higher Natural Gas Prices Boosting Drilling?
During the 2016-2019 “growth phase,” E&Ps “were focused on growth at all costs,” said Henderson. “And anytime we saw gas prices get above about $3.00, it seemed like we saw a pretty much instantaneous response from producers. And I just don’t think you can assume that’s going to happen anymore.”
The upshot is that the market will be more balanced, with a lower likelihood of becoming oversupplied with “low volatility and a kind of a low gas price level,” Henderson said.
He predicted “we’re just not going to be in that kind of market anymore. It’s going to be better balanced.”
Besides highlighting the change in pace at which rig additions follow price action, Henderson said that E&Ps would likely continue to increase natural gas volumes – particularly dry gas from the Haynesville Shale and associated gas from the Permian Basin – even while publicly traded operators maintain a disciplined focus that emphasizes returning cash to shareholders.
To be sure, he said that 2022 guidance from operators projects roughly 20% growth in capital spending. However, he added that production growth would likely be “pretty healthy” but “moderate” and “nowhere near where we were” during the previous recovery.
Henderson also cited cost inflation on the order of “about 10-15%” as a key reason for the “moderate” growth.
In addition to having their extra capex “eaten up by additional inflation,” producers “are actually having to drill wells,” he said. Henderson cited the declining inventories of drilled but uncompleted (DUC) wells.
Recent Energy Information Administration (EIA) figures showed a 156-DUC well drawdown from January to February. In February, drilling permits year/year were up in the Permian and down in the Haynesville.
Henderson pointed out that the EIA’s recent DUC well count does not consider an important factor: the age of the well.
Citing 2017-2021 data from Enverus, he pointed out that a relatively small number of DUCs remained in inventory two years after spudding was completed.
“When you’re looking at DUC numbers, you’ve got to remember that if a well is older than two years old, it’s very likely that it’s never going to be completed, ever,” the ConocoPhillips executive said.
Coal-to-Gas Switching Ahead? Or Not?
In other market observations, Henderson said that ongoing U.S. coal power plant retirements should elevate gas-fired power burns over the next few years, making coal-to-gas switching – and vice-versa – less of an option for utilities.
“It’s degrading the market’s ability to balance between coal and natural gas,” he said. “And so it’s taking away that very important balancing mechanism in that market, and that’s going to introduce additional volatility that we haven’t previously seen.”
Year/year, summer liquefied natural gas (LNG) feed gas demand should on average be about 2 Bcf higher, from about 10-12 Bcf/d, he noted.
Referencing healthy margins for LNG exports, Henderson said U.S. liquefaction terminals likely will “keep running at their full capacity” this summer.
That, along with Europe’s below-average winter gas storage and its urgency to diversify its LNG supply amid the Russia-Ukraine conflict, should boost the case to grow U.S. LNG export capacity.
Henderson said the added fuel to the fire from the Russian conflict could make this year “very healthy for final investment decisions.”
