Why natural gas production is rising as gas targeted rigs fall


Natural gas production, but gas targeted rigs fall Since mid-2011, natural gas production has increased even though the number of natural gas targeted rigs has fallen. The U.S. Energy Information Administration (or EIA), in its Short Term Energy Outlook released in July, 2014, reported that for April, 2014, natural gas production, wet gas including natural gas liquids (or NGLs), totaled 73.5 billion of cubic feet (bcf) per day. For reference, throughout 2013, natural gas production averaged around 70.2 bcf per day. The drop has been driven by sustained low natural gas prices. Low natural gas prices can cause producers to stop drilling for natural gas because the economics of drilling natural gas wells becomes less and less attractive with lower natural gas prices. While natural gas prices throughout 2014 are up from last year, with 1H14 prices averaging $4.60 per million British thermal units (or MMBtu) compared to the 2013 average price of $3.73 per MMBtu, they’re still lower than historical levels given the strong supplies of gas from the horizontal drilling and hydraulic fracturing induced shale boom in the U.S. Currently, natural gas is trading at around ~$3.78 per MMBtu. This trend has also been forming due to a combination of other factors. First, while companies have increasingly targeted oil because it’s more profitable, most oil wells also have significant natural gas production. The increase in oil-targeted drilling has helped contribute to natural gas production. Another factor contributing to the increase is the development of super-prolific areas such as the Marcellus Shale. Wells in the best areas of these plays have extremely high natural gas production rates, and also very low cost per unit of production, making drilling them profitable even at low gas prices. Natural gas rigs drilling can indicate the sentiment of major natural gas producers, such as Chesapeake Energy (CHK), Comstock Resources (CRK), Southwestern Energy (SWN), and Range Resources (RRC). Many of these names are also part of energy exchange-traded funds (or ETFs) such as the S&P Oil & Gas Exploration & Production ETF (XOP).



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