US shale firms amp up natural gas output as futures signal more gains

Houston

HIGHER natural gas futures prices for 2021 and a continued glut of crude oil are prodding US shale firms to boost gas drilling and production.

Shale producers are increasing spending on natural gas, a change from the past, amid forecasts for a 45 per cent jump in gas prices next year compared to a 15 per cent gain for Brent prices. The shift is a reminder to the Organization of the Petroleum Exporting Countries (Opec) meeting this week how shale moves quickly in response to price. Opec is considering whether to ease oil output curbs from Jan 1.

The largest US shale oil producer, EOG Resources, last month said that from next year it will start selling gas from 15 new wells from a newly discovered field holding 21 trillion cubic feet of gas. Continental Resources recently shifted drilling rigs to gas from oil in Oklahoma. Apache Corp last month said it plans to complete three Texas wells after lifting its third-quarter US gas production by 15 per cent over the second quarter and 6 per cent over the same period last year.

"Demand has remained pretty robust. Supply has been starved for capital," said Christopher Kalnin, chief executive of Denver-based Banpu Kalnin Ventures, which recently closed a deal to acquire Devon Energy natural gas assets. Banpu Kalnin has hedged about 65 per cent of its gas production for next year.

The number of US rigs drilling for natural gas, an indicator of future output, has climbed 13 per cent to 77 since July.

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About a quarter of all active US rigs are drilling for gas, up from 16 per cent last year, according to services firm Baker Hughes.

In the Haynesville gas field that spans Louisiana and Texas, the number of working rigs is up 25 per cent since July. Rigs also are up 8 per cent in the Marcellus, the top US gas field.

Gas prices could jump 45 per cent to an average US$2.94 per million British thermal units (mmBtu) in 2021, from US$2.03 this year, analysts predict. That would be the highest annual average since 2018. Summer 2021 prices could hit US$3.50 per mmBtu, according to Bank of America, from US$2.84 per mmBtu last Friday.

Helping to drive the improved outlook is expanding US liquefied natural gas (LNG) shipments. Last month, LNG exports rose above pre-Covid-19 levels and could average 8.4 billion cubic feet per day in 2021, a 31 per cent increase from 2020, according to the latest US Energy Information Administration forecast.

Producers have doubled their natural gas hedges since March, locking in prices for future output. They have hedged 53 per cent of next year's gas volumes compared with 43 per cent of their oil, according to finance services firm Raymond James.

Natural gas "has not been hit as hard as crude" by the Covid-19 pandemic, said Bernadette Johnson, a vice-president at data provider Enverus. "For those that have some diversity in their assets, it can help them weather the storm."

EOG's gas wells at its new field are as profitable as its best oil wells. Future drilling there after 2021 will be "based on market conditions", said executive vice-president Ken Boedeker.

Gas prices are benefiting in part from oil drilling cutbacks that reduced associated gas, or gas produced as a byproduct of oil output. The decline in associated gas has led to the current gas-price rally, said Eugene Kim, analyst at consultancy Wood Mackenzie.

The price rally has boosted shares of natural gas-focused shale producers. Range Resources is up about 65 per cent this year, EQT by 48 per cent and Southwestern Energy Co has climbed more than third. In contrast, the SPDR S&P Oil & Gas Exploration & Production ETF is down 39 per cent till last Friday. REUTERS