Natural gas economic shut-ins! Shutting off a producing well on purpose, because the market won’t take the produced volume at a reasonable price. There was a time, back before gas commodity decontrol, when shut-ins were standard operating procedure, but that practice went the way of the dodo bird 40 years ago. Until earlier this year that is, when amid crushingly low prices, Appalachian producers said: enough is enough — and shut off the spigot themselves. In the months that followed, various producers have continued to see-saw their production in response to weather-related demand and regional market prices. The behavior signals that Appalachia’s shale gas producers are increasingly employing a light-switch approach in dealing with short-term weakness in demand and prices. Today, we take a closer look at the price-driven curtailments in the Northeast and potential implications for the market.
Yup, back before natural gas decontrol some four decades ago, pipelines purchasing gas often had the right to shut-in some level of a producer’s volume due to market conditions. But when producers gained the right to control their production and market their gas, large-scale economic shut-ins came to an end. Producers wanted the cash from their wells ASAP. Further, they assumed that volumes not produced today wouldn’t be monetized until the end of the well’s producing life, which clinched the decision that shut-ins would rarely make economic sense.
Economic shut-ins of gas wells returned briefly to the limelight in the early days of the Shale Revolution, when gas prices tanked, and shale gas producers would do what RBN’s OG blog writer Rusty Braziel christened back in a 2012 blog as “shut-in by press release”: respond to low prices by announcing upcoming shut-ins, but continue to forecast aggressive production growth. The shut-ins that did happen were ultimately immaterial, likely just the lowest-producing, least-efficient wells that didn’t make a dent in overall production growth. Conventional wisdom among shale gas producers was that shutting in productive wells was, as described above, almost always uneconomical and could possibly damage wells and hurt well performance, potentially permanently. So, producers instead focused on the long game: weathering bearish cycles by slowing drilling and completion activity, increasing efficiencies by consolidating capital investments to the most productive acreage and wells, and otherwise lowering costs until prices improved. All the while, they avoided price-driven shut-ins of existing production.
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