SCOOP-STACK stages summer drilling rebound amid higher gas prices, returns

Natural gas production from the SCOOP-STACK could see a rebound back toward pre-pandemic levels by later this year following a recent resurgence in Midcontinent drilling activity.

Year to date, output from the Oklahoma basin has averaged about 3.6 Bcf/d, remaining almost 15% below its pre-pandemic average at 4.2 Bcf/d in late 2019 , S&P Global Platts Analytics data shows.

Output from the SCOOP-STACK has been remarkably stable this year with the exception of a brief but steep decline that came in February amid a historic production freeze-off in the Midcontinent and Texas. That relatively static production profile could be about to change, though.

Since mid-April, operators in the SCOOP-STACK have expanded their drilling footprint by over 50%, adding nine rigs to reach a total of 25 in the week ending July 7, data published by Enverus shows. Assuming those rig additions are sustained through the summer months, the production impact from the recent ramp up in drilling could become apparent by as early as the fourth quarter.

Last year, a sustained decline in drilling activity across the SCOOP-STACK raised doubts over the basin's long-term potential for growth. This summer's rig additions come following a steady rise in gas prices across the Midcontinent and recently improved rates of return – both offering potential for producer optimism.

Gas prices, IRRs

At NGPL Midcontinent, the region's benchmark upstream hub, cash prices have edged into the mid-$3s this summer – up about $1/MMBtu, or more than 40%, since April amid tighter US gas supply. In July 12 trading, spot-market prices at the Midcontinent hub gained about 5 cents to settle at $3.46/MMBtu, according to preliminary settlement data from S&P Global Platts.

Prices close to that level are likely to endure for a while to come. In the forward market, the balance-2021 curve at NGPL Midcontinent is currently pricing at an average $3.51/MMBtu. The Q1-2022 strip is now priced even higher at $3.77/MMBtu, S&P Global Platts' most recently published M2MS data shows.

Higher spot and forward gas prices in the Midcontinent have dramatically improved internal rates of return, or IRRs, in the SCOOP-STACK. In the former basin, half-cycle post-corporate tax IRRs were estimated in June at nearly 25% – up from about 12% in January, Platts Analytics data shows.

In the STACK, half-cycle returns in June were estimated at 27% – above the theoretical threshold for "incentivized drilling and completion" according to Platts Analytics. As recently as January, returns in the SCOOP stood at just 13%, barely above theoretical breakeven level at 10%.

In recent months, Platts Analytics has forecast a steady, 10% to 15% decline in production from the SCOOP-STACK through late 2022 after many operators paused drilling and completion activity there last year. An increased focus by many E&Ps on premier basins like the Permian, the Bakken and the Eagle Ford has led many industry observers to anticipate less scope for growth in plays like the SCOOP-STACK.