Associated US gas production growth could see renewed momentum this summer as Russia's war in Ukraine keeps crude prices near record levels, boosting drilling margins and upstream activity in domestic oil-focused shale basins.

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Over the past month, US crude prices have zoomed past $100/b following the global market higher as energy supply concerns in Western Europe mount. At the US benchmark WTI location, prices were at a nearly ten-year high in March, averaging about $109.25/b, data from S&P Global Commodity Insights shows.

Internal rates of return for US producers -- particularly those operating in the oil-focused shale basins -- have surged as a result, hitting historic highs this month. In the Permian's Delaware Basin, where breakeven prices are among the lowest of any US shale play, half-cycle post-tax IRRs have jumped to nearly 80% in March, according to a recently published analysis from S&P Global.

In other oil-heavy basins, including the Eagle Ford and the Bakken, returns are now estimated in the upper-70% range. Even in some of the more costly drilling locations, like Oklahoma's SCOOP-STACK, half-cycle IRRs have climbed to over 50% in March – well above the 25% minimum threshold required to incentivize new drilling and completion activity.

Upstream activity

As producer prices and margins continue to rise, upstream activity now appears to be accelerating.

In the Permian Basin, drillers have added some 20 rigs since mid-February with the total now estimated at 328 as of the week ended March 23, data published by Enverus showed. In February, Permian operators drilled some 343 new wells and completed an estimated 429 -- both levels unseen since the pre-pandemic days of March 2020, data from the US Energy Information Administration showed.

In the Eagle Ford, the Bakken and the Denver-Julesburg, upstream activity has also accelerated in March with rig counts rising about 8%, 9% and more-than-12%, respectively, since mid- to late-February. Data published earlier this month by the EIA showed prior gains in new well drilling and completions across all three basins last month, with continued gains likely to have accrued in March.

Production

The rise in US producer margins and upstream activity this year promises a yet-unseen major boost for US gas production coming in large part from associated output in oil-heavy plays like the Permian, the Eagle Ford and others.

In March, US dry gas production has edged up to an estimated 93.8 Bcf/d, rising 1.3 Bcf/d from its prior-month average as output recovers from an extended series of freeze-offs in January and February.

US gas production, though, has yet to regain momentum seen in late-2021, which culminated late in the fourth quarter as output topped 96 Bcf/d. Given the recent surge in crude prices, an acceleration in upstream activity and improved industry sentiment observed in the Federal Reserve Bank of Dallas' first-quarter Energy Survey, its possible that renewed moment for gas production growth will come from oil-focused drilling.

According to a recent forecast published by S&P Global analysts, associated gas production from oil-heavy basins including the Permian, Eagle Ford, Denver-Julesburg, the SCOOP-STACK and the Bakken, could account for upwards of 3 Bcf/d in new production growth over current levels by year-end 2022.