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January 2015 SEE Monthly Brief
Haynesville, Louisiana Dry Natural Gas Field
Although in U.S. oil and natural gas prices are often considered delinked due to their different markets, the precipitous drop in oil prices brings into sharp relief ways in which they are connected. This decline has led to announced capital expenditure cuts of 28% on average at 24 companies, as well as rig count cuts averaging 42% at these companies. The focus for this month's analysis is this linkage and the prospects for the Louisiana Haynesville dry gas shale.
The oil price drop from over $100/barrel to $45/barrel affects the natural gas price in both negative and positive ways. Negative factors are: a) overseas LNG markets are priced based on oil prices, so U.S. gas has become less competitive for LNG export; and b) heating oil prices—a small market but important to the Northeast—have fallen with oil prices, so natural gas offers less of a price advantage for home and commercial heating. Thus, there is reduced incentive to build new gas pipelines in the Northeast.
Positive factors are c) as U.S. oil drilling falls, so does the production of associated, or casinghead gas and natural gas liquids; and d) drilling costs for both oil and natural gas fall as service companies cut costs to keep market share. Something whose positive and negative effects aren't sorted out is e) ethane, which can either be rejected (kept in the natural gas stream, adding to supply) or recovered. While less ethane is produced due to reduced drilling, in markets where it is priced off of oil or it competes with oil, producers may be incentivized to keep it in the gas stream (thus increasing head-to-head competition with methane). A complicating factor is that since ethane is richer (has a higher thermal content per volume) than methane and pipelines have safety and standardization limits on richness, ethane cannot be mixed into natural gas in unlimited volumes.
Gas demand and price factors that are not a function of oil include f) weather (the factor that swamps all others), g) the increase in industrial use as new plants are built on the U. S. Gulf Coast, a positive; h) the environmental and regulatory lean away from coal and toward natural gas for electricity generation, a positive; and i) most interestingly and also a positive—as Richard Mason of Hart Energy points out, refracks in mature basins can be quite cheap ($1 million vs. $4-$9 million for a new well) and thus profitable.
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Copyright 2014, Starks Energy Economics, LLC. This information is confidential and is intended only for the individual named. This information may not be disclosed, copied or disseminated, in whole or in part, without the prior written permission of Starks Energy Economics, LLC. This communication is based on information which Starks Energy Economics, LLC believes is reliable. However, Starks Energy Economics, LLC does not represent or warrant its accuracy. This communication should not be considered as an offer or solicitation to buy or sell any securities.
I, Laura Starks, do hereby certify that, to the best of my knowledge, the views and opinions in this research report accurately reflect my personal views about the companies and their securities as of the date of this report. These viewpoints and opinions may be subject to change without notice and Starks Energy Economics, LLC will not be responsible for any consequences associated with reliance on any statement or opinion contained in this communication. No Starks Energy Economics, LLC consultant or analyst has nor will receive direct or indirect compensation in return for expressing specific recommendations or viewpoints in this report. Analysts or consultants with Starks Energy Economics, LLC are long Approach Resources and Diamondback stock.
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