US shale gas drillers have not dropped rigs fast enough to scale back production and provide support for natural gas prices, energy industry and equity analysts said.
The problem has been aggravated by the potential for more associated gas from the Permian Basin as US shale oil drillers slowly increase their activity, Matt Hagerty of BTU Analytics LLC told clients in a note.
The average price of gas for day-ahead delivery dropped month over month in March in all US regions. BTU Analytics expected natural gas prices to test the $2/MMBtu floor repeatedly this summer. The firm's 2023 price forecast called for an average gas price of $3.19/MMBtu. The consensus of analysts surveyed by S&P Global Market Intelligence put the average 2023 price at $4.24/MMBtu.
"The slowdown in activity so far this year is far from what is necessary to avoid further downward pressure on pricing, especially in natural gas markets," Hagerty, BTU Analytics' senior manager of energy markets, told clients March 30.
Active fields
Oil-directed rig activity in the Permian is still increasing, Hagerty said, and "horizontal rig activity in natural gas-directed regions has yet to post a significant decline. This is especially prominent in regions like the Haynesville, where rigs have fallen by just two (or 2.5%) from the September 2022 peak of 79."
Two shale gas exploration and production companies (E&Ps), Southwestern Energy Co. and Comstock Resources Inc., idled rigs in Louisiana's Haynesville Shale, a basin that is ripe for trimming. But the three Haynesville rigs were not enough of a cut, analysts said. In addition to one rig in the Haynesville, Southwestern dropped one rig in Appalachia.
"Operators have been slow to curtail horizontal rigs across the shale paths, even in the face of lower pricing," Hagerty said. "If producers fail to lay down rigs at a faster pace, and subsequently turn those wells online, then natural gas pricing risks even further downside than what BTU Analytics currently models."
To help balance the gas market, Permian drilling needs to drop as well, Hagerty wrote in the note issued just before OPEC announced production cuts to prop up global oil prices. "Natural gas production growth from oil-driven regions also has a major impact on Henry Hub pricing," Hagerty said. "Without a decline in drilling and completion activity in both oil and gas-directed plays, the current near-term Henry Hub view may prove too optimistic."
Dark rigs
Truist Securities Inc. analyst Neal Dingmann told clients that some private drillers were cutting activity and rigs. "We spoke to many of our public E&Ps and learned very few planned any new change of activity despite materially lower commodity prices," Dingmann told his clients March 16, well before the OPEC announcement. "The biggest [drilling and completion] changes we have heard about recently are private natural gas-focused operators who have dramatically changed their ops plans, with some even letting all rigs go."
Dingmann said a challenge with "dramatic changes in plans like this" was that such a change could take hundreds of millions of dollars to reverse if production begins to decrease.
For E&Ps, the silver lining to the lower US commodity prices was that prices for oil field services such as rig rentals and completion — or fracking — have stopped increasing, Dingmann said. "We anticipate that [oil field services] inflation increased nearly 5% on average in 1Q23, though if current commodity prices hold we expect little additional inflation," the analyst said.
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