US Natural Gas … New Production Continues to Offset Legacy Production – #NaturalGas #CrudeOil

Seven key tight oil and shale gas regions accounted for 92% of domestic oil production growth and 100% of domestic natural gas production growth during the 2011-2014 period. Those key seven regions are shown in the below map.

Key US Tight Oil and Shale Gas Regions, 09Jan16

Both natural gas and crude oil have experienced substantial price declines since 2014 as can be seen in the below charts of front month futures prices dating back to 2005.

Natural Gas

NatGas Chart, 09Jan16

Crude Oil

Crude Oil Chart, 09Jan16

We would expect substantially lower price at the wellhead would translate into lower production levels, after all, the cure for low prices should be low prices.

We also recognize that nearly all wells produce some combination of natural gas and crude oil, such that from a producer’s perspective, higher prices from one commodity can offset lower prices from the other. Higher crude oil prices from 2010 thru mid 2014 essentially enabled higher associated natural gas production. However, the collapse of both crude oil and natural gas prices since mid 2014 should have resulted in substantial production declines by now. For the remainder of this discussion we focus on natural gas production.

Murphy & Company’s US natural gas production forecast model suggests domestic production should have began decline during the summer of 2015. To date, this has not been the case.

US NG Marketed Production Model, 09Jan16

An examination of new well gas production vs legacy well production decline provides some answers. The following table details the change in natural gas production from the seven key shale gas regions for the period Jan15 versus Dec15, in MMcf/d.

Change in Natural Gas Production, 09Jan16

While new drilling activity is substantially lower, improved early production from new wells is substantially offsetting the decline from legacy wells.

Furthermore, the following table demonstrates the impact on drilling economics based upon the expected ratio of crude oil vs. natural gas production for the average of 2015 vs. current prices.

Production Economics relative to Crude Oil and Natural Gas Mix, 09Jan16

At current prices, new wells can only be justified at partial recovery of full book costs. Furthermore, at current natural gas prices, any new natural gas well is almost certainly justified on a cash cost basis only.

Absent immediate production declines, crude oil and natural gas prices are almost certainly to move lower.

Murphy & Company, LLC may hold long or short positions in crude oil or natural gas.

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