Natural Gas Production Decline vs Demand Comeback

This article is adapted from Edison’s Monthly Monitor Report – June 2020, a comprehensive assessment and analysis for the natural gas, electric, and crude oil markets. To download the complete report, please click here.

Can the mismatch between natural gas supply and demand be balanced? Find out how the market has reacted to declines in demand during COVID-19 and how and when demand may return to “normal”.

The question of whether the current mismatch between supply and demand of natural gas can be balanced is not new. The industry has lived through multiple shortage and surplus scenarios over the past thirty years – so is this time any different? It is likely that the only differences are the variables that play into the correction and the amount of pain each side of the supply/demand equation will feel before it improves. Hurricanes Katrina and Rita in 2005, as well as the financial meltdown in 2008, are all examples of significantly impacted supply or demand where in the end, the market corrected.

We are now seeing natural gas production decline appearing in nearly every area of the country. According to EIA data, the seven major shale production regions including Appalachia, Anadarko, Bakken, Eagle Ford, Haynesville, Niobrara and Permian have had a combined production decline of 4.8 Bcf/d during the last seven consecutive months. This trend started in December 2019 and is expected to continue through at least June 2020.

Declines were expected in the oil focused plays like the Bakken, Permian, Eagle Ford, and Scoop-Stack region of Anadarko as associated gas from oil was shut in. However, declines are also being seen in the gas focused Northeast plays of Marcellus and Utica. One of the largest gas producers in the Northeast, EQT, announced production cuts of up to 1.4 Bcf/d in Ohio and Pennsylvania starting on May 16.

Is there cause for panic?

Not yet. Demand is also on the decline with the most visible sign of this in a recent drop in utilization of LNG exports. After a record high of 8.7 Bcf/d for the pre-COVID-19 month of February 2020, the month of May only averaged 6.7 Bcf/d, a 2 Bcf/d drop in three months. Forecasts are showing even more reductions in June with nearly 40 cargoes cancelled and continued negative netbacks for U.S. LNG in the forwards through October 2020. The “LNG Feedgas” chart below shows the amount of LNG feedgas going to LNG export facilities in the U.S. year to date 2020 (orange line) vs 2019 (blue line).

LNG demand destruction is negating much of the supply reduction being reported to date. With declining rig counts still being reported each week, the timing required to drill and bring production to market becomes an issue if pricing triggers that start the process do not occur early enough to match the comeback in demand. The first signs to watch for in the comeback of supply will be an increase in rig count. Until that happens the following supply formula will need to be tweaked to manage the potential changes in demand:

(Flowing production) + (drilled but un-completed wells connected) – (legacy well decline) + (available storage) needs to = or exceed (Demand)

If you have questions or concerns, please reach out to your contacts at Edison Energy for a discussion or send us an email at information@edisonenergy.com.