Friday, March 30, 2012

Natural Gas Production in Jan. Sets New Record

The Shale Gale Continues.....
The Energy Information Administration reported today that natural gas production in the United States reached a new monthly record high of 2.577 trillion cubic feet in January.  That's an increase of 11.6% compared to a year ago, and 16% above January 2009.  The ongoing increases in production to record high levels, along with sluggish demand due to the mild winter, explain why prices for natural gas in the futures market are at a 10-year low, and a  17-year low, when adjusted for inflation (lowest since 1995). 

Update: In response to the comment from Unknown, the chart below shows both Gross Withdrawals and Marketed Production, on a 12-month moving average basis.  Over the one-year period through January 2012, marketed production has actually increased by 8%, which is more than the 7.1% increase in gross withdrawals.  On an unadjusted basis, the 12-month increase through January was 9% for marketed production and 11.6% for gross withdrawals, but for December, the increases were 8.5% for marketed and 7% for gross withdrawals. 
 


20 Comments:

At 3/30/2012 7:32 PM, Blogger VangelV said...

The problem is the price. When you need $7.50 per Mcf to break even a new record level of production that only gets you $2.25 is not positive news. Why is it that economists can't figure out that profits are essential to keep production stable or growing?

 
At 3/30/2012 7:50 PM, Blogger Mark J. Perry said...

Fact: Natural gas production set a record in January, regardless of profit/loss. If firms are losing money, why do they keep producing at record highs? I just report the EIA data on record-high production and record-low prices. If firms can't make a profit at current prices, they'll cut back production, and in six months I'll be reporting rising prices and falling production.

The profit/loss system and market prices will dictate the future, no argument there.

Maybe you should contact the gas producers and tell them that it's not profitable to produce gas at record levels when they're not covering costs of production. Maybe they haven't figured that out yet, and they need experts like you to guide them? I see a profitable consulting business here for you.

 
At 3/30/2012 7:51 PM, Blogger Benjamin said...

Vange-

1. Because wells will keep producing if marginal revenues exceed $2.25
2. Because some technology and wells are better than others, and make money at $2.25
3. Because some new wells will make money on oil and condensates. Gas is a sideline.

Sure, there will be a bust in natural gas. After every commodities bust, there is a shake-out, then maybe a boom, and then another bust.

That's the nature of the commodities business.

 
At 3/30/2012 8:04 PM, Blogger Dan Ferris said...

Be careful extrapolating costs and prices. Both are highly dynamic. The industry is building scale, which changes the cost structure. Some companies are making money selling gas right now. They're not hard to find, either. I know a company that's pulling gas out of the ground in the US for less than $1/mcf. It's not hard to make money at $2.25/mcf when you're doing that.

 
At 3/30/2012 9:15 PM, Blogger PeakTrader said...

The End Of Exxon's Reign? PetroChina Now The Biggest Oil Producer
3/29/2012

PetroChina, a state-controlled giant, just announced its oil production has topped Exxon’s.

(However) Exxon’s combined oil and gas production was 4.5 million barrels per day in 2011...well above PetroChina’s 3.5 million daily barrels.

PetroChina’s largest shareholder, with an 86% stake in the company, is the Chinese government.

PetroChina’s 2011 profits slid 5% to $21 billion as the company grew its productive capacity. Exxon Mobil saw profits surge 35% to $41.1 billion on falling production.

Among Exxon’s strengths is its prowess in natural gas...the U.S.' largest producer of natural gas.

******

Oil Profits Slide Fastest Since Lehman Collapse on Gas: Energy
February 21, 2012

Exxon and Chesapeake Energy Corp. will see net income in 2012 slide about 8 percent and 10 percent, respectively, according to the mean of analyst estimates compiled by Bloomberg.

Exxon’s output was 49 percent gas last year, up from 38 percent five years earlier.

Horizontal drilling techniques and advances in hydraulic fracturing developed in north Texas during the past 15 years have enabled energy producers to unleash oil and gas from rock formations such as shale.

Reserves in places like North Dakota and Pennsylvania that were once regarded as untouchable will make most energy imports superfluous during the next two decades.

The supply bonanza of gas and oil made possible with fracking means the U.S. will become increasingly independent of foreign energy producers at the same time as burgeoning economic powers such as China grow more reliant on overseas supplies.

 
At 3/30/2012 10:01 PM, Blogger VangelV said...

Fact: Natural gas production set a record in January, regardless of profit/loss. If firms are losing money, why do they keep producing at record highs? I just report the EIA data on record-high production and record-low prices. If firms can't make a profit at current prices, they'll cut back production, and in six months I'll be reporting rising prices and falling production.

Fact: The CEOs of shale gas producing companies have made it very clear on many occasions that they need far higher than $4.50 to break even, and more than $7.50 if all of the costs are properly accounted for. They are clearly losing money at the low prices that we have seen over the past few years. This is why the conference calls are full of references to funding gaps and the need to sell assets because cash flows are negative. It is also a fact that if producers stop drilling they will have to write down their leases. That would mean negative equity and bankruptcy.

We have been on this topic for more than a year. The fact that you have yet to actually look into any of the details speaks volumes for the disinterest in the actual details and the interest in spinning a narrative that cannot be supported by reality.

Maybe you should contact the gas producers and tell them that it's not profitable to produce gas at record levels when they're not covering costs of production. Maybe they haven't figured that out yet, and they need experts like you to guide them? I see a profitable consulting business here for you.

If you had paid any attention to the activities in the sector, listened to the conference calls, or looked at the credible analysts you would already know that the gas producers have no desire to keep drilling because they are losing money. The fact is that they have little choice because of the lease terms. All you need to do is to look at a few of the 10-Ks and you would have a much better idea of what is going on than you actually do. It seems to me that you are missing the shale bubble just as you missed the housing and debt bubbles.

 
At 3/30/2012 10:09 PM, Blogger VangelV said...

1. Because wells will keep producing if marginal revenues exceed $2.25

They still have to return the money that they borrowed. The costs that have been sunk already cannot be ignored for very long.

2. Because some technology and wells are better than others, and make money at $2.25

We already said that a few of the wells in the core areas of the best formations can make money. But the companies have wells that lose a lot of money. They are also producing.

3. Because some new wells will make money on oil and condensates. Gas is a sideline.

As I said, those wells are very small and the condensates are not generating as much money as you think because not all of the facilities that are required are available.

The fact is that the cash flows are negative and the only thing that is keeping the bubble intact is the Fed's willingness to keep adding liquidity to the system. Try reading a few of the 10-Ks and listening in on the conference calls.

 
At 3/30/2012 10:14 PM, Blogger VangelV said...

Be careful extrapolating costs and prices. Both are highly dynamic. The industry is building scale, which changes the cost structure. Some companies are making money selling gas right now. They're not hard to find, either. I know a company that's pulling gas out of the ground in the US for less than $1/mcf. It's not hard to make money at $2.25/mcf when you're doing that.

Scale? Sorry but scale does not work well when you are going out and drilling the non-core areas. Once the low hanging fruit has been picked your costs go up, not down.

People are very good at coming up with narratives to support a view that they want to be true. But reality has a way of intervening and trends that cannot continue will reverse. That is the case with shale gas right now. All of those new wells will produce more gas. But most older wells lose 90% of their production within 18 months or so. That means that just to keep production flat the industry needs to drill some very expensive new wells that cannot do anything but generate more losses. Even an eternal optimist like Mark knows that cannot work for long.

 
At 3/30/2012 10:41 PM, Blogger morganovich said...

vangel has a point here.

it's a capx vs marginal cost issue.

let's assume that we drill 10 wells and they cost 1.5mm each.

lets say the gas in them is only worth $300k each at $2.50.

all the money is sunk upfront.

we're going to produce at any price above the marginal cost of actually getting it out of the ground, even if there is a huge glut.

we are paying leases we need to cover and that, in many cases, we will outright lose if we stop producing. (welcome to the BLM)

so, we are faced with a hobson's choice.

we know that if we produce now, we are never going to get our money back, but, if we do not, we're going to lose even more.

it's very possible for a whole market to never make its money back. look what has happened to the flat panel manufacturers.

this will, of course, lead to fewer wells being drilled in the future.

i'm not well enough versed in the costs and resource values of many of the shale wells to really weight in on what the P/L including capx is going to look like, but dismissing the idea that the industry can be in a hobson's choice and overproducing as the less bad option seems like a big assumption to make. it can and does happen. it sure happened to the builders in 2007.

and once you have a rig rented and or a well partially drilled, it may be best to go forward, even if you are just minimizing the loss.

again, i'm not sure how this all plays out, but the simple math i have seen makes it look awfully unlikely that a producer can make money on most shale wells at $2.50.

there are lots of possible reasons to produce at a loss mark. i think it's worth giving them some consideration.

 
At 3/31/2012 3:55 AM, Blogger Ron H. said...

OMG! Where have I seen that shape before?

 
At 3/31/2012 9:41 AM, Blogger VangelV said...

again, i'm not sure how this all plays out, but the simple math i have seen makes it look awfully unlikely that a producer can make money on most shale wells at $2.50.

There is even a bigger math issue in play. That is depletion. Given the huge drop of production in the first year you have to keep drilling at a loss just to keep production level. That makes the growth curves unsustainable and they would remain unsustainable even at $7.50 per Mcf because that is the true cost of marginal production even in the core areas.

This is not to say that money losing shale wells at $5.50 will have no value. They certainly come in handy to conventional companies that are looking for a way to hide their reserve issues. Thanks to the SEC rules about reserve recognition and the 'boe' conversion factors a company that picks up money losing shale wells could show a pop in their reserves and gain in market price. An aggressive management team can use the overvalued shale price to acquire conventional reserves through take-overs. By the time the shale gas scam is over the decline in reserves can be offset by the exploding price that lifts all boats. To eliminate this problem the US needs a NI 43-101 equivalent standard. But if that were to be implemented the shale bubble would burst immediately.

 
At 3/31/2012 8:00 PM, Blogger Unknown said...

BTW, that chart shows gross withdrawals. It includes gas that has been injected into storage (basically, un-needed gas). Though technically it's gas that's been "produced," by including stuff that's been injected into storage you're including certain quantities that never made it to market. Kind-of like including inventories in your monthly sales figures. A better EIA data set to use is "Marketed Production." That one doesn't show as sharp an increase of late (though it's still setting records).

 
At 4/01/2012 9:11 AM, Blogger morganovich said...

mark-

"Over the one-year period through January 2012, marketed production has actually increased by 8%, which is more than the 7.1% increase in gross withdrawals. On an unadjusted basis, the 12-month increase through January was 9% for marketed production and 11.6% for gross withdrawals, but for December, the increases were 8.5% for marketed and 7% for gross withdrawals. "

i think this is the wrong way to look at it and that the %'s are misleading.

gross withdrawals were up a great deal more than marketed in actual units.


if you produced 120 widgets, up from 100 and sold 100 up from 81, sure sales show a greater % increase, but in units, you actually have more unsold units.

i'm not sure how one would characterize that as a market with demand increase outpacing supply.

the percentages and the units are going in opposite directions, as they appear to be in gas.

i'm not really sure how these 2 series are calculated, but it strikes me as odd that you can have withdraws outpacing marketed production for so long unless producers are flat out destroying gas (flaring it off etc).

anyone have some thoughts on why this spread is persistent?

 
At 4/01/2012 9:42 AM, Blogger Mark J. Perry said...

The main point of the post was that natural gas production set a new record monthly high in January, and it's a record high by either measure: gross withdrawals or marketed production. I have also reported "dry production" output in the past, but those data are not yet available for January.

 
At 4/01/2012 4:43 PM, Blogger morganovich said...

mark-

sure, i understand that, but it does seem odd that marketed gas has lagged behind extracted gas for such a long period.

it also seems odd that anyone would drill a gas well for economic reasons right now. current prices make it very difficult to make back the capx.

i am far from an expert in this field, but i have this lingering suspicion that most of the current drilling is based on jacking up market caps by increasing reserves or ebitda as opposed to purely cash on cash return.

this is a cycle that plays out in various business segments (internet, housing, etc) over and over.

the equity markets pays for X so you give them X even if it is non-economic. such trends can go on for years, but ultimately, they all end in busts. i lack what i would consider even a remotely investment grade opinion on the gas markets but i have been involved with some guys who lease 3d seismic equipment to do drilling surveys (and had revenues double in 2 years) and keep watching this because they are going to be a massive short when this busts.

 
At 4/01/2012 6:57 PM, Blogger Hell_Is_Like_Newark said...

Say's Law is kicking in here: Production will make its own demand.

Sasol announced they will be building a gas to liquids (GTL) plant in Louisiana to make light oils from natural gas.

Exxon partnered with the Swiss firm Gigamethanol to develop a nat. gas to methanol to gasoline process. They want to employ it in Alaska. The advantage is that methanol can be mixed with crude and pumped through existing pipelines.

There are two firms building pilot plants for micro channel Fischer Tropsch reactors, that can be mounted on offshore oil platforms, for Petrobas. Currently, nearly 1/4 of the gas produced is flared off because there is no way to transport it.

Chesapeake Energy has partnered with Sundrop to develop a GTL process to upgrade all the dry gas Chesapeake is making into something worth more $$$.

Yes, there is going to be a shakeout of the over-leveraged players. In the long run through, the energy situation for the USA (at least on a technical level) is pretty bright.

 
At 4/01/2012 7:31 PM, Blogger Unknown said...

Looks like I stand corrected on the relative rises of the two measures. Thanks for the pointer, Mark.

 
At 4/01/2012 8:35 PM, Blogger morganovich said...

"Yes, there is going to be a shakeout of the over-leveraged players. In the long run through, the energy situation for the USA (at least on a technical level) is pretty bright."

perhaps, but perhaps not.

if gas is being sold below the all in cost to produce it due to a nasty hobson's choice and companies looking to maximize reported profits as opposed to actual roic, then this is going to lead to a real bust and the folks who built those plants are going to get a massive hosing.

keep in mind that gas to liquids processes are VERY inefficient.

 
At 4/01/2012 9:16 PM, Blogger Hell_Is_Like_Newark said...

keep in mind that gas to liquids processes are VERY inefficient.

10 years ago yes... but there has been huge progress in just the past few years. Based on what I have researched, GTL is now competitive as low as $60 per bbl oil. Some developers are claiming as low as $30 per bbl, but I will see it before believing it.

Exxon/Gigamethanol's project for the North Slope of Alaska was to deliver gasoline at $2.65 to $2.85 per gallon, which will include a $1.45 margin. This was based on last year's natural gas rates.

 
At 4/04/2012 1:37 PM, Blogger VangelV said...

it also seems odd that anyone would drill a gas well for economic reasons right now. current prices make it very difficult to make back the capx.

The choice is a simple one. Lose money on production or write down the leases. If you choose to recognise reality you lose your company to the creditors and lose your job sooner rather than later. I would say that the incentives provide us with a clear explanation of why we are seeing what we are seeing.

 

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