Something’s Got To Give In The US Natural Gas Market – Business Insider
By May, billions in write-offs were pummeling the industry. Chesapeake and other producers were dumping assets to stay afloat. The rig count dropped to 600. Shale gas production was an uneconomic activity at these prices—though by May 23, it had climbed to $2.73 per MMBtu, up 44% from the April low.
The economics of horizontal fracking are horrid. With all wells, production drops over time. But instead of years for traditional wells, decline rates for shale gas wells are measured in months. After a year, production may be down by 80%, after a year and a half by 90%. High production early in the lifecycle allows drillers to show a big upfront profit. Initially, decline rates are obscured by production from new wells. But reality caught up with them. And they responded by switching to drilling for oil and gaseous liquids, which fetched higher prices; they had to survive, and producing dry NG wasn’t a survivable activity.
But the benefits of dirt-cheap NG were spreading across the country: households and companies had reduced energy bills. Power generators benefitted from their strategy, launched in the 1990s, of investing in highly efficient natural gas combined-cycle (NGCC) turbines. The building boom of NGCC plants nearly doubled natural gas-fired capacity, at the expense of coal-fired plants—which are being retired at a breath-taking pace [Natural Gas Is Pushing Coal Over The Cliff]. And companies that manufacture plastics, fertilizers, and chemicals from NG are building plants in the US where they can buy their raw material for a fraction of the cost elsewhere in the world.
By June 20, excess inventory levels were plummeting. It had become clear: storage levels would not reach capacity, and NG would not drop to zero. Speculating in NG entered the sweet spot: the price was still way below the cost of production, but the threat of zero had been taken off the table. Timing remained uncertain, but sooner or later the price would have to self-correct, and by nature, it would over-correct. The rig count had fallen to 562—but production was still rising. The price dropped to $2.53 MMBtu at the Henry Hub. Nothing is ever easy.
So, when will production finally decline? With drilling activities slowing, production should follow, the theory goes. But there’s a laundry list of reasons why it hasn’t happened: producers are now only drilling their most productive wells; drilling technologies have become more efficient, such as pad drilling; finished wells that had been shut in due to pipeline constraints or collapsing local prices, including over 1,000 wells in northern Pennsylvania, are coming on line; dry gas production as a byproduct from the booming oil and gaseous liquids plays is surging; etc.