Operators in the US Rocky Mountain region said natural gas prices must maintain an average of more than $4/MMBtu before any significant ramp-up in production occurs, according to the latest survey by the Federal Reserve Bank of Kansas City.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
The average price needed to significantly boost drilling and completion activity was $4.27/MMBtu, oil and gas firms operating in the region said. This is a much higher price point than the survey has ever recorded. The previous high mark required for Henry Hub to accelerate production was $3.97/MMBtu, recorded during the fourth quarter of 2016.
"Year-over-year indexes increased further from the previous survey," read the federal report. "The year-over-year drilling and business activity index rose from 69 to 75. The indexes for capital expenditures, employment, and wages and benefits all indicated higher levels than a year ago. The revenues and profits indexes also remained very high. However, supplier delivery times remained higher than a year ago for a small share of firms."
Despite seeking even higher natural gas prices before significantly ramping up production, the bulk of the companies surveyed do expect higher capital expenditures in 2022. About 20% expect capital spending in 2022 to increase significantly compared with 2021, while another 50% expected slight increases. Only 6% of companies expected capital spending to decline. Approximately a quarter believe 2022 capital spending will remain close to 2021 levels.
"Several firms reported that inflation has driven higher capital spending costs from services and materials," according to the survey. "Other contacts reported increased capital spending plans to expand drilling and production."
Production in major Rockies' shale basins has been much slower to rebound to prepandemic levels than plays in other US regions, according to data by S&P Global Platts Analytics. For example, the Denver-Julesburg Basin averaged more than 2.5 Bcf/d for the six months leading up to May 2020, which is when pandemic-related declines became apparent. It had only rebounded to an average of 2.3 Bcf/d for the last six months of 2021.
Similarly, the Green River-Overthrust averaged 2.7 Bcf/d during the six months leading up to May 2020. It remained well below that average at 2.3 Bcf/d over the last half of 2021. Applying the same time frames, the Piceance has declined from 1.4 Bcf/d to 1.2 Bcf/d and the Powder River from 800 MMcf/d to 718 MMcf/d.
Total Rockies production has declined from 9.1 Bcf/d to 8.2 Bcf/d. It is projected to average a mere 7.6 Bcf/d in 2022, according to Platts Analytics. If the projection holds, it would be the lowest ever recorded for the region by Platts Analytics. The next lowest year of 8.09 Bcf/d occurred in 2005. Under current drilling and completion activity in the region, it will never rebound to prepandemic volumes.
"There is not enough investment for replacement barrels," according to a Federal Reserve survey respondent. "Supply may shrink and demand will stay similar or even grow."
"Not enough new reserves are being drilled to replace existing production," echoed another.