This post by Jeff Bolyard, Principal, Energy Supply Advisory, is featured in our December 2023 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To read the full newsletter, click here. To sign up for the Monthly Monitor distribution list, click here.
Natural gas production growth in the U.S. has risen exponentially over the past decade, particularly in non-conventional shale plays. Seven major shale production regions in the contiguous states make up roughly 90% of all natural gas production in the U.S. In 2013, those seven regions averaged 39.9 billion cubic feet of natural gas production per day. In 2023, the U.S. Energy Information Administration (EIA) estimates that those same seven regions will produce 98.9 Bcf per day – a 250% increase over that time period – which has supported an ongoing shift from coal to renewables, providing lower costs and resiliency in the process.
Of the seven regions, three of them – Bakken, Eagle Ford, and Permian – not only produce natural gas, but also happen to produce significant amounts of crude oil. So much oil, in fact, that those three regions, also known as the “Oil Plays,” represented ~73% of the all-time high record oil production of 13.2 million barrels per day in November 2023. These three Oil Plays also contributed significantly to natural gas production, adding 31 Bcf per day, or ~36% of the seven-region total last month. While the three Oil Plays produce both commodities, crude oil pricing is the primary driver of the investment decision for producers in these regions.
Two more of the seven regions, Appalachia and Haynesville, or the “Gas Plays,” produced more than half of all shale production last month, coming in at 52% of the total. But unlike the Oil Play regions that produce significant amounts of both oil and gas, the Gas Plays produce very little crude oil. In fact, the EIA reported that just 1.7% of the oil produced from the seven shale regions came from Appalachia and Haynesville last month.
When we look a little deeper at how those seven shale regions contributed to the overall growth of natural gas production, we see some trends that make us ponder the future of natural gas growth and what drives that growth.
The chart below shows the year-over-year (YOY) growth of natural gas for the Oil Plays and Gas Plays over the past decade. From 2014 to 2021, the Gas Plays contributed the bulk of growth each year, as one would expect, while the Oil Plays added significant volumes as well, peaking in 2018 and growing by a combined 10.6 Bcf per day YOY when compared to 2017.
In 2020, prompted by Covid demand destruction, growth was muted due to decades-low pricing of both commodities before growing again in 2021. Beginning in 2022 and again in 2023, (highlighted oval), we began to see a new trend, where the Oil Play growth of natural gas exceeded growth of the Gas Play members.
During the past two years, Oil Plays grew by an average of 3.6 Bcf per day while Gas Plays grew by an average of just 2.3 Bcf/day. While gas buyers welcome and benefit from associated gas production from Oil Plays, the trend of what drives this growth raises concerns about future growth being tied to oil prices rather than natural gas prices.
This shift requires us to ask: What happens to natural gas production if oil prices fall further? WTI benchmark crude oil prices have fallen from recent highs of over $120/barrel in June 2022, to the current price of $72.32/barrel. While this is still profitable for most U.S. oil producers, interest in drilling for crude has waned, with oil rig counts falling 20% from year-ago levels. This serves as a prime indicator that future additional production growth of oil and the associated natural gas from those wells – which represented the bulk of natural gas growth over the past two years – is at future risk.
As you smile this holiday season while filling up your car with gasoline that is cheaper than last year – and perhaps wishing that it were even cheaper – be mindful that lower gasoline prices are tied to crude prices, which would be inversely correlated to natural gas under the scenario where lower crude oil prices would reduce producer investment in drilling for oil. This would result in a decline in associated gas growth in the future.
A buyer’s financial gain in crude and gasoline today may be tomorrow’s financial pain for natural gas, so be careful what you wish for and the unintended consequences.
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