Finally Some Good News for Natural Gas Producers in Texas

After a tumultuous year, things are beginning to look up for natural gas producers, particularly in Texas. As previously reported, Texas producers have been among the hardest hit by the recent decline in gas prices, which reached a low of just $1.66 per million British thermal units (MMBtu) earlier this year, down from $6.00 in 2014. Declining gas prices have forced producers to cut output, with the Railroad Commission (RRC) reporting that 3,200 billion cubic feet (Bcf) of gas was produced in Texas during the first five months of 2016, roughly 11 percent below the same period last year. Lower gas production should, over time, put upward pressure on prices. Adding to this pressure is high demand for gas, particularly in the electric power sector.

While most electricity was once generated from coal, since the 1990s, gas-fired generation has increased dramatically. The U.S. now generates approximately one-third of its electricity from gas. According to a new report published last week by the U.S. Energy Information Administration (EIA), on July 21, daily gas consumption for electricity generation hit a record high of 40.8 Bcf. Over the course of the month, gas consumption averaged 36.1 Bcf per day, 1.5 Bcf above the previous record (from July 2012). This has contributed to a decline in gas inventories, with 6 Bcf more gas being withdrawn from storage than was added to it in the week ending July 29, something that rarely happens in summer. In fact, the last summertime decline in gas inventories was a decade ago, in August 2006.

Withdrawals from storage typically spike in winter, when gas is needed to heat buildings. Throughout spring and summer, as outside temperatures rise and there is less need for heating, gas demand usually falls. The one exception is the South Central region, where hot summertime weather leads to high demand for electricity, much of which is generated from gas. Net withdrawals from gas storage often occur in the South Central region in summer, but are usually offset by net injections in other areas. This year, however, lower production has resulted in less gas being added to storage. At the same time, widespread hot weather has increased demand for gas, resulting in significant withdrawals.

EIA Table

Source: U.S. Energy Information Administration (http://www.eia.gov/naturalgas/weekly/)

News of the decline in gas inventories caught many by surprise. Heading into last winter, inventories were at a record high, exceeding 4,000 Bcf in November 2015. They remained at record levels at the end of the winter, due to limited demand (as a result of warm weather that reduced the need for heating), as well as high levels of production. As a result, 2,478 Bcf of gas remained in storage on March 30, 2016, compared to 1,500 Bcf at the same time last year. Many expected this glut of gas to keep prices low for months or even years to come. That now looks unlikely, however.

Following announcement of the decline in inventories, gas prices rose to $2.85 per MMBtu, nearly one percent higher than the previous day. Although prices subsequently declined to finish $0.50 lower, some analysts are predicting a more permanent return to high prices over coming months. The EIA’s August 2016 Short-Term Energy Outlook (STEO) forecasts a return to prices above $3.00 per MMBtu by mid-next year. Others are even more optimistic. As the EIA noted in its STEO, gas futures contracts imply a price of up to $4.28 per MMBtu by December 2016, rising to over $6.00 in 2017.

Along with higher prices, the future could also bring cost savings for gas producers, particularly those in Texas. The Texas RRC this week unveiled a new Oilfield Relief Initiative aimed at lessening the regulatory burden on oil and gas producers. The Initiative proposes amendments to various RRC rules, including those dealing with permitting and reporting. Among other things, the RRC will:

  • undertake a review of its permit application forms to determine whether the data collected through those forms is still used and eliminate any forms that are no longer necessary or useful;
  • simplify permit re-issuance applications so that producers are not required to duplicate the information in their original application and can simply provide a statement verifying that there are no changes to that application; and
  • lessen the reporting requirements imposed on producers, including reducing the need for gas well status reports, which are currently filed semi-annually to document the amount of gas, condensate, and water produced at each well.

In calling for these reforms, RRC Commissioner Christie Craddick declared that they will save producers “tens of millions of dollars,” helping to maintain their profitability amid low prices. Seeking to provide further help to producers, Commissioner Craddick and her two counterparts have also approved a rule change, enabling marginal wells to remain in operation longer.

Recent gas price declines have forced many producers to reduce output from existing wells. There are, however, limits on the extent of such reductions. Current RRC rules require wells to produce at least 100,000 cubic feet of gas per month. Wells producing less than that amount for three consecutive months are considered inactive and must be returned to active status (i.e., such that monthly production exceeds 100,000 cubic feet) or plugged. This may lead to the premature abandonment of wells, particularly at times of low prices, when maintaining high levels of production is unprofitable. When a well is abandoned, all surface infrastructure must be removed, making it difficult to resume production at a later time, for example when prices rise.

Seeking to give producers greater flexibility to respond to price changes, the RRC this week announced that it would lower the well production requirements. Under the new requirements any well producing 50,000 cubic feet or more of gas for three consecutive months or any amount of gas for 12 months will be considered active and may continue operating. That’s good news for producers, allowing them to reduce output from marginal wells, without having to abandon them. This will not only lower production costs, but could also result in higher prices, making it a win-win for producers.

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