Natural gas production is bullish despite falling rig count

By

Updated

Natural gas production

Since mid-2011, natural gas production increased even though the number of natural gas-targeted rigs has fallen.

The U.S. Energy Information Administration (or EIA)—in its Short-Term Energy Outlook (or STEO) released in September 2014—reported that dry natural gas production is set to increase to 69.7 billion cubic feet per day (or bcf/d) in 2014 and 71.1 bcf/d in 2015. In 2013, the country produced 66.5 bcf/d.Natural gas production and rig counts

For reference, it averaged ~69.3 billion bcf/d for the first half of 2014.

In contrast, natural gas rigs continued to fall over the past three years. From ~930 in October 2011, it has come down to the current level of ~338.

The EIA’s preliminary data shows that the rise in the production trend continued in July and August. The increase in production is driven by higher production in the Marcellus and Utica.

According to the EIA, the Marcellus region—located across West Virginia, western Pennsylvania, and eastern Ohio—has become one of the fastest gas producing regions in the U.S. In August 2014, the region produced ~16 bcf/d—compared to ~1.7 bcf/d in 2007—or a growth of ~9x.

Currently, there are ~81 rigs operating in the Marcellus Shale. Most of the rigs are natural-gas directed.

There has been a marked increase in the rig efficiency—particularly in the new shales in the U.S. To know more, read our articles here.

A counterintuitive trend

This trend formed due to a combination of other factors. First, while companies have targeted oil because it’s more profitable, most oil wells also have significant natural gas production. The increase in oil-targeted drilling helped contribute to natural gas production.

Article continues below advertisement

Another factor contributing to the increase is the development of super-prolific areas like the Marcellus Shale. Wells in the best areas of these plays have extremely high natural gas production rates. They also have very low costs per unit of production. This makes drilling them profitable—even at low gas prices.

In such a scenario, where the number of gas-targeted rigs actually start increasing, natural gas prices could come under even more pressure.

Key stocks and exchange-traded funds (or ETFs)

Natural gas prices affect drilling sentiment for major natural gas producers like Chesapeake Energy Corporation (CHK), Cabot Oil & Gas Corporation (COG), Devon Energy Corporation (DVN), and Southwestern Energy (SWN).

Many of these producers are also part of energy ETFs like the Energy Select SPDR ETF (XLE).

In the next part of the series, we’ll discuss how “liquids” prices have affected drilling patterns.

Advertisement

More From Market Realist