Natural gas producers are ready to pounce when prices rebound
U.S. natural gas producers are slashing production in response to multi-year low prices. But they are also looking beyond the current slump, preparing to turn on more output by flexible operation of their inventory of wells.
“Natural gas is currently pricing at or below costs of production,” an executive at an exploration and production company said in comments in the quarterly Dallas Fed Energy Survey released this week.
Prices are historically low due to weak winter demand amid milder weather, record output at the end of 2023, and higher-than-average natural gas stocks.
Working natural gas stocks in the week to March 22 were 41% more than the five-year average and 23% higher than last year at this time, per the latest EIA data.
The oversupply and low prices have prompted many producers to start reducing production. But some are also stocking up inventories of wells ready to start pumping – or to be turned in line – as soon as prices rebound. Producers expect natural gas prices to recover next year amid growing demand for LNG exports and new LNG export plants that are slated to begin operations in 2025.
“All of us in the natural gas business are pinching as many pennies as we can right now,” Josh Viets, Executive Vice President and Chief Operating Officer at Chesapeake Energy, told the audience at Hart Energy’s DUG GAS+ Conference & Exhibition 2024 in Louisiana this week.
But Chesapeake Energy, set to become the top U.S. natural gas producer after the planned merger with Southwestern Energy, is also deferring production from around 80 wells this year, which would give it up to 1.0 bcf/d of productive capacity available from deferred turn in line wells (TILs) by the end of 2024.
“The way I like to think about it is we’re using the reservoir as storage,” Viets told the conference, as carried by Bloomberg.
“When the market says, ‘hey, I need more gas,’ we’ll be in a position to quickly restore that to help meet the needs of consumers.”
In the Q4 2023 earnings release in February, Chesapeake Energy said it would be building productive capacity to align with consumer demand. By year-end, the company plans to have deferred around 35 drilled but uncompleted wells (DUCs) and about 80 TILs. A measured approach to production activation would be responsive to market demand, Chesapeake noted.
Other U.S. natural gas drillers, including the current top producer EQT Corporation, have also reduced output in response to the low domestic prices.
“The low prices we are experiencing now are causing us to tuck it in and keep our powder dry,” an executive at an E&P company said in comments to the Dallas Energy Survey.
“While companies are certainly protective of cash flow, they all want to be ready to service the next wave of LNG projects coming online in 2025,” Erin Faulkner at Enverus wrote this week.
Despite multi-year low natural gas prices in the United States, domestic producers continue to be optimistic about the long-term prospects of gas as a fuel, both in America and abroad.
Recent deals for LNG supply and midstream expansion point to an optimistic view in the industry about global gas demand and the role the U.S. could play in meeting said demand, despite the halt to LNG permit reviews.
Chesapeake, for example, signed in February its first LNG Sale and Purchase Agreements to buy around 0.5 million tonnes per annum of LNG from Delfin LNG at a Henry Hub-linked price with a targeted contract start date in 2028. Chesapeake will then deliver the LNG to commodity trader Gunvor on an FOB basis with the sales price linked to the Japan Korea Marker (JKM) for a period of 20 years.
Pipeline giant Enbridge announced this week a joint venture to build and operate natural gas pipelines connecting gas supply from the Permian to the U.S. Gulf Coast to tap into growing LNG export demand.
Henry Hub prices are set to rise by the end of 2024, and further still in the medium term, according to executives polled in the Dallas Fed Energy Survey.
Survey participants expect a Henry Hub natural gas price of $2.59 per million British thermal units (MMBtu) at year-end, compared to an average price of $1.44 per MMBtu through most of March when the survey responses were collected. Executives see Henry Hub prices at $3.18 per MMBtu two years from now, and at $3.94 per MMBtu five years from now.
