Let's talk about a drilling boom!
The recently released EIA Annual Energy Outlook 2016 forecasts almost unlimited gas supply at low prices. This is a lie! U.S. shale gas production is declining because of low prices AND WILL CONTINUE TO DECLINE!
The financial performance of shale gas-weighted E&P companies in the first quarter of 2016 was a disaster. Chesapeake, the biggest shale gas producer in the US, had negative cash from operations. That means that oil and gas sales didn’t even cover operating costs. Other shale gas plays including Anadarko, Comstock and Petroquest also had negative cash from operations. Goodrich and Sandridge are in bankruptcy and Exco and Halcon will soon follow. Ultra, Forest, Quicksilver, Swift and Talisman went BK last year. On average, surviving companies out-spent cash flow by two-to-one both in 2015 and 2016 but many normally strong companies greatly increased negative cash flow this year.
In other words, gas prices below $3 cannot sustain producers so why is the EIA lying to us!
Shale gas is the principal support for all U.S. gas production since conventional gas is drying up. U.S. dry gas production has declined almost 1 Bcf per day since September 2015 largely because of low gas prices.
Henry Hub gas prices have fallen 120% over the last 2 years from more than $6/mmBtu in January 2014 to $2.47 today and prices have been below $3/mmBtu since early 2015. A similar gas-price decline occurred from June 2011 to April 2012. Then, dry gas production fell when prices dropped below $3/mmBtu.
$3 is well below the breakeven gas price for any operator in any play. Even in the Marcellus–the most commercially attractive shale gas play–breakeven prices are more than $3.
All plays have declined from their respective peaks except the Utica Shale. Marcellus production accounts for more than a third (-0.36 Bcf/d) of shale gas decline in 2016. There is certainly no shortage of supply in that play but low prices and related delays in pipeline commitments have taken their toll on production.
There are no longer any "tier 1" horizontal rigs drilling in the Barnett or Fayetteville. These plays were supposed to help provide the U.S. with 100 years of gas supply.
Gas prices must increase or there will be no one left to produce it!
Lower gas production along with increased consumption and exports spell much higher gas prices later in 2016 and in 2017. On the other hand, the very latest estimates from EIA show that there will be no more storage capacity by October 2016. No more storage capacity will move prices to $1.00/mmBtu.
How can that be true!
Shale gas made sense in 2010 when real gas prices averaged almost $7/mmBtu. That was because there was a supply deficit as conventional production declined before shale gas supply increased to replace it.
Falling gas prices have exposed the BIG LIE. Production growth in the last few years was funded by debt. Capital in search of yield continued to flow and overproduction pushed prices $1.61 by the end of 2015. Gas producers had to produce to pay the interest on the debt, and they did not want anyone to know about it!
The wreckage was obvious in late 2014 but no one so it coming. The disastrous 1Q16 financial data and falling production should have made it clear to everyone. The Barnett and Fayetteville plays that were supposed to last 100 years are dead at current prices. The Haynesville will probably follow soon enough. Capital is vanishing into thin air and so will production.
SOMEBODY LIED TO INVESTORS IN A BIG WAY! SEE MY NEXT POST TO FIND OUT WHY!
