US Associated Gas Output Slows, Supports Prices

Associated gas production at oil-focused US shale plays has declined in line with lower spending, providing modest support to US natural gas prices, according to Fitch Ratings.

Natural gas volumes are down across a number of key liquids-rich shale basins: a review of Energy Information Administration data suggests Eagle Ford, Niobrara, Permian, and the Bakken are all lower while US dry gas production has stabilised at about 73bn ft³/d, down 1% on the year. Until 2014-5, US dry gas production was growing at 5-6%. 

Improved demand from hot summer weather and additional switching from coal to gas have seen prices almost double from earlier this year when gas prices briefly dipped below $1.50/'000 ft³ (about $1.50/mn Btu).

Drilling decisions in associated gas plays tend to be driven by oil/natural gas liquids (NGLs) pricing, so if oil or NGLs rebound then so would gas output and weigh on prices. Conversely, a lagged recovery in oil/NGLs pricing would tend to keep activity in the shales depressed, further reducing associated gas production and supporting gas prices, if all else is equal.

Fitch said the US gas market is more reliant on improved demand fundamentals than the oil market, and may therefore take longer to see a reasonable price recovery. "Our current base case price deck for Henry Hub natural gas is $2.35/'000 ft³ in 2016, $2.75/'000 ft³ in 2017, $3.00/'000 ft³ in 2018, and $3.25/'000 ft³ in the long term.

In addition to supportive weather, current demand drivers include additional coal to gas switching; a further ramp up in industrial demand for natural gas, including the large slate of greenfield chemicals capacity on the gulf coast and elsewhere; export demand to Mexico; and modest liquefied natural gas export demand, it said.

William Powell