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Gas production falling off despite increase in drilling

by Christine Buurma and Naureen S. Malik Bloomberg News | April 29, 2017 at 2:03 a.m.

The number of U.S. rigs drilling for gas has almost doubled since August, but output continues to fall.

Even accounting for a lag between the start of drilling and first production, the drop in output is striking -- a well in the Marcellus shale, America's most prolific reservoir of the fuel, is producing about half of what it yielded a year ago, according to Bloomberg Intelligence.

Companies are struggling to overcome steep decline rates -- the natural decrease in production -- from shale formations that were the source of huge added supplies in years past. The slowdown could signal an end to a glut that's sent prices down 12 percent since the beginning of the year, making natural gas one of the worst performers in the Bloomberg Commodity Index. Hedge funds have increased bullish bets that output will fall short of demand as cheap U.S. supplies head to Mexico and overseas buyers.

Gas production has been "pretty abysmal," Tom Ward, chief executive officer of Mach Resources LLC and co-founder of Chesapeake Energy Corp., said in an interview Wednesday. Unless prices rise enough to increase output, "we're going to be short gas going into the winter."

Producers have to drill at a breakneck pace just to keep output stable -- a phenomenon known as the Red Queen, after the character in Lewis Carroll's Through the Looking-Glass who tells Alice, "It takes all the running you can do, to keep in the same place." While the number of gas rigs has climbed 90 percent over the past year, output of the fuel in the lower 48 states is down 1.1 percent, data from Bloomberg and Baker Hughes Inc. show.

"The life cycle of the wells that have been drilled are coming to an end," said John Borruso, director of natural gas trading at Consolidated Edison Inc.'s Con Edison Energy in Valhalla, N.Y. "I see production coming online slowly."

Gas futures for June delivery rose 3.7 cents to settle Friday at $3.276 per million British thermal units on the New York Mercantile Exchange.

For gas wells brought online since 2014 in the Marcellus, located primarily in Pennsylvania and West Virginia, the average 12-month decline rate is 51 percent, said Will Foiles, an analyst with Bloomberg Intelligence in New York. That means that a well in the reservoir that started producing a year ago at 10 million cubic feet a day is now yielding only 4.9 million.

The drop in gas output stands in contrast to rising production from America's oil patch, where the surge in shale drilling has been a more recent phenomenon and producers have amassed a bigger backlog of wells waiting to be connected to market. There were more than 1,800 drilled but uncompleted wells in West Texas' Permian Basin at the end of March, almost triple the Marcellus total, government data show.

The number of completed wells in the Permian, the biggest U.S. oil play, jumped by more than 50 percent from December through March, while Marcellus completions rose only 14 percent, according to Bloomberg Intelligence.

Also contributing to the slowdown in gas output is drillers' cautious approach in the face of large stockpiles of the fuel. While production cuts by major oil exporters have helped ease concern about excess crude supplies, gas inventories remain about 15 percent above normal seasonal levels after an unusually mild winter.

A year after the historic rout in energy prices forced more than 100 explorers into bankruptcy, gas producers are working to strengthen their balance sheets, adding output slowly as the industry awaits signs of a sustained rally.

Southwestern Energy Co., which saw its share price drop more than 50 percent between May 2015 and May 2016, is taking a "disciplined" approach to drilling projects, according to Chief Executive Officer Bill Way. The Spring, Texas-based explorer, which has more than 500,000 net acres in the Marcellus, is expected to increase gas production by about 2 percent this fiscal year, based on analysts' estimates compiled by Bloomberg. That compares with a jump of about 17 percent between 2014 and 2015.

"We will invest within cash flow, because that's the right thing to do for us, and we will not invest in projects when the economics derived from gas prices do not justify us doing that," Way said in New York on April 4.

Information for this article was contributed by Alix Steel of Bloomberg News.

Business on 04/29/2017

Print Headline: Gas production falling off despite increase in drilling


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