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Copper Tip Energy Services
Vista Projects
Copper Tip Energy
Vista Projects

Promised Land for Gas Drillers Turns Into Glutted No Man’s Land

These translations are done via Google Translate

February 5, 2018, by Ryan Collins


Natural gas producers who last week were basking in the strongest price environment in almost a quarter century are getting crushed.

A January rally in U.S. gas futures that was on course to be the best for that time of year since 1994 fizzled in the final two days of the month as mild winter forecasts cast gloom on the demand outlook. But investors had already began dumping gas stocks, spooked by the specter of a glut later this year.

More than $7 billion in market value has been wiped out so far this year for the eight biggest U.S. gas producers that don’t also pump significant amounts of crude, according to calculation by Bloomberg. Among the hardest hit have been Southwestern Energy Co., Gulfport Energy Corp. and Range Resources Corp., which have been mauled to the tune of 30 percent, 27 percent and 22 percent, respectively, since the end of 2017.

In a matter of months, swelling output from Pennsylvania gas wells is expected to smash head-on into a growing quantity of the fuel from West Texas fields where it’s a byproduct of oil production. Shipments of the fuel to Mexico and other foreign markets isn’t growing fast enough to absorb burgeoning output from shale fields with names like the Marcellus, the Eagle Ford and the Permian.

Ground zero for the clash of competing supplies will be the U.S. Gulf Coast, home to the nation’s first gas-export facility as well as onshore pipelines that haul gas across the Rio Grande to Mexican buyers. Drillers who ramped up production in anticipation of a demand-driven price spike along the Gulf may be facing a starkly different reality.

Evolving markets

“Those premium markets stop becoming premium markets as more gas starts flowing there,” Scott Hanold, energy analyst at RBC Capital Markets LLC in Minneapolis, said by phone. “That’s just the natural evolution of how things go.”

Representatives from Range and Gulfport were not immediately available. A Southwestern spokeswoman couldn’t immediately comment.

For years, drillers in the U.S. Northeast were hemmed in and unable to fully access population centers and points of export because of insufficient pipeline capacity. With demand for the furnace and power-plant fuel expected to almost double by 2020 in some parts of the Gulf Coast, pipeline operators are furiously building new lines to connect the Marcellus shale in Appalachia to richer markets.

But timing couldn’t be worse: As soon as much of that Pennsylvania gas reaches Louisiana and Texas, it’ll be competing with loads of the fuel pumped from West Texas and the ensuing fight for market share seems likely to squeeze prices.

Construction season

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More than 9 billion cubic feet a day of pipelines will be added in the Northeast this year, with the bulk shipping gas southbound, David Deckelbaum, analyst at KeyBanc Capital Markets Inc. in New York, said by telephone. That’s an add-on of nearly 35 percent from the end of last year, according to Bloomberg New Energy Finance data.

In response to the buildout, drillers in the region upped production to 26 billion cubic feet a day in November, a 15 percent increase from the previous year, according to the Energy Information Administration.

But at the same time, the amount of gas produced in Texas jumped, rising to 23 billion cubic feet a day, or a 6.7 percent increase from a year earlier. This is all on the heels of rising oil prices, making producers pump as many molecules as they can out of the ground to maximize profits. But the hitch is that Permian wells don’t just produce oil. In fact, on average, one-third of a typical well’s production in that region is gas, according to RS Energy Group.


“The higher the price of oil goes, even with more disciplined spending plans from the” drillers, “you would expect still activity is going to grow,” Hanold said. “Which obviously challenges natural gas prices.”

Trimming production for Northeast producers can be a challenge because so many have signed agreements to pour pre-determined amounts of gas into the new pipelines. If they don’t pump the fuel, they are contractually obligated to pay anyways, adding to losses.

“It’s a you’re damned-if-you-do and damned-if-you-don’t scene if you’re an Appalachian producer that has a ton of long-haul commitments on these pipelines,” Deckelbaum said.

Mexico Delays

After Mexico opened its energy sector in 2014, a wave of pipelines and gas-fired power plants were announced, opening a new vein of demand for U.S. producers. But the region has been plagued by an abundance of delays and interruptions, meaning the payday for drillers has been pushed back.

Adding to the the downfall in prices, there’s a lag of new liquefied natural gas exports due. Dominion Energy Inc.’s Cove Point LNG complex will be just the second gas-export facility in the continental U.S. when it kicks off in March. After that, no new terminals are set for completion until at least the end of the year.

“If you go back a few years, there was a hope that LNG exports and Mexico exports would be a boom for the industry and help spur some demand to keep the supply-demand balance tighter,” Hanold said. It hasn’t quite worked out that well, he said.

And with oil prices starting to steady, investors are jumping ship on the gas-heavy companies, Hanold said.

“Frankly, with oil prices being a lot stronger in the mid-60s now, I think there’s more appetite to invest in the more oily names too at this point,” Hanold said.

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