Sooner or Later? – The Search For Signs of A Natural Gas Production Slowdown – Part 2

On Tuesday of this week the Energy Information Administration released its latest Drilling Productivity Report, projecting declines in US natural gas production volumes. Meanwhile, daily pipeline flow data shows gas production hitting record highs and gas storage fill could also be heading toward maximum levels.  The CME/NYMEX Henry Hub natural gas price for the November 2015 is responding to these burgeoning supplies, settling yesterday at $2.518/MMBtu, near all-time lows for this time of year. Today we continue our look at the various sources of natural gas production data and what they tell us.

In the first part of “Sooner or Later,” we looked at the natural gas production data in EIA’s historical monthly report – the Natural Gas Monthly (NGM) – as well as two of its forward-looking monthly reports – the Short-Term Energy Outlook (STEO) and the Drilling Productivity Report (DPR). The September ending NGM published actual gas production volumes for July 2015 for the first time and showed that gas production rose to a record high in July, exceeding June production and also trumping prior expectations for July in the STEO and DPR data, both of which last month had predicted that July 2015 volumes would decline month-on-month. What’s more, the September 2015 STEO also raised its projections for August through December 2015 by about 100 MMcf/d.

The latest DPR released earlier this week (Oct. 13) revised its July 2015 gas production estimates up by a total of about 400 MMcf/d across all seven shale basins, and, further, it lifted its projections for August through October 2015 as well. Upward revisions were largest in the Utica and Permian basins. Unlike the STEO and NGM, however, the latest DPR continues to predict that the combined volumes from all basins declined between June and July and will continue to decline month-over-month through at least November.

We explained last time that while the various EIA datasets are generally reliable for the historical periods, it isn’t unusual for the forecast periods to be revision-prone and underestimate growth in this environment where producers are rapidly adapting to lower market prices. In this case, standard model assumptions based on historical metrics, even recent history, become less accurate for predicting future production volumes. As we touched on last time, this is due to changes in producer productivity, including improved completion techniques and a focus on high-yield wells in “sweet spots” or increasing well completion rates, all of which can cause production to increase even as rig counts remain down. In effect this increases how much gas is produced per rig for new wells, an important metric if you’re trying to answer the question of whether production from new drilling is enough to offset existing wells’ natural decline rates. This measure is a key feature of the DPR, which provides historical “production per rig” for new wells and projects it forward for the three months after the last month of actuals published in the NGM. Because productivity is constantly changing, however, the forecast is subject to historical bias. But its “production per rig” metric does provide valuable market intelligence about the trajectory of efficiency rates by shale basin, as shown in Figure 1. 

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