As natural gas production in the US heads towards its 5th straight year of increases, it’s important to note that the same market forces that have tapered off petroleum production seem to be working in the opposite direction for natural gas. Falling natural gas prices have not led to a decrease in production as shale drillers here in the US continue to increase efficiency.
In fact, it has been the ability to drill more efficiently for natural gas that has led to falling prices that has in turn led to increased demand. The opposite is true for petroleum, but it’s important to understand that while E&P companies drill both petroleum and natural gas, that’s where the similarities end.
Unlike petroleum, natural gas is a clean burning source of energy. In fact, more and more coal-fired plants are being refitted to burn natural gas these days and it’s the combination of cleaner burning and cheaper costs that makes natural gas so attractive in the first place. It’s efficiency that keeps O&G companies coming back for more even as the price for natural gas continues to drop.
Falling prices lead to increased natural gas drilling efficiency
In fact, it’s the falling prices themselves that have led to a need for increased efficiency when drilling for natural gas. While prices may have fallen by 32 percent in recent months, production in the Marcellus Formation is expected to increase by as much as 2.8 percent in 2015, this according to the EIA. Overall natural gas production is estimated to increase by 3.2 percent.
The 2.8 percent increase in the Marcellus pales in comparison to the 21 percent gains of 2014, but still it is an increase in production when many analysts were predicting a slowdown. In fact, while some companies may be cutting back, Cabot O&G is estimating it will increase production by as much as 20 percent in 2015. So what’s behind the increase in natural gas production even as prices continue to fall? In a word: Efficiency.
New pad drilling techniques and rig mobility allow rig operators to drill more efficiently. Rig mobility means reducing the time and cost of moving from one well location to the next. Horizontal drilling means drilling pads now house multiple wellheads.
What this has done is to make falling prices even more attractive to drilling operations. Increased demand due to a decrease in the price of natural gas over the years has even led the EPA to announce that carbon emissions in the US are now at their lowest levels in more than 20 years. Natural gas is the energy source of the future and falling prices only drive demand higher.
Decreasing prices – Increasing demand
As long as natural gas drillers can continue to increase efficiency, falling prices are not their enemy but their friend. The more affordable natural gas is, the more it will continue to replace coal. Natural gas futures were down another 2.1 cents to 2.579 mbtu on Friday and still productivity estimates continue to rise. In fact, the relationship between the decrease in natural gas prices and the increase in productivity can be mapped all the way back to 2008, showing that natural gas prices are down by as much as 81 percent since then. The recent drop in natural gas prices is not a one-off phenomena but instead a long-term trend, this as production continues to rise.
On top of that, if last year’s estimates are any indication then natural gas output for 2015 could increase even more. Natural gas production was estimated to rise by just 1.4 percent in 2014 by the EIA, but instead it was up by 5.6 percent. The EIA sites an increase in efficiency, especially in the Marcellus Formation, as the reason why.
Southwest Energy Corp. is reporting output may increase by as much as 28 percent in 2015, this as it increases efficiency through longer wells. Gas production itself has risen four-fold in the Eagle Ford since January 2007.
Although the combination of falling prices and increased production for natural gas goes against all the laws of supply and demand, it’s the attractiveness of the energy source itself and increased efficiency that’s the reason why. Add to that the unofficial backing of the EPA, and you’ve got a recipe for sustained productivity moving forward despite falling prices both for long and short-term trends.
…original content by PPE