Analysis: DJ Basin gas production falls on crude collapse, ethane price recovery

Denver — Depressed crude oil prices and improving ethane prices look bearish for the Denver-Julesburg Basin's production outlook this year and into the next, which could spark price gains for natural gas in the region.

S&P Global Platts Analytics' latest DJ production forecast contracts significantly in May and June, averaging 2.09 Bcf/d and 1.8 Bcf/d, respectively, before increasing to 2.23 Bcf/d in July, down from 2.65 Bcf/d in April. The updated production forecast implies a reduction of approximately 0.46 Bcf/d in supply May through July. This stands in contrast to a forecast released in early March due to voluntary curtailments and shut-ins as crude prices remain weak.

Production is expected to recover during the second half of 2020 as shut-in wells return. However, production declines due to lower rig counts will accelerate at the end of the year and into 2021. Rig counts in the region have plummeted. As of April 29, only nine active rigs remained in the basin, the lowest mark on record, according to Enverus. Rigs have fallen by over 60% since early March when the price collapse started.

State data also reveals pullbacks. Producers sought 21 permits to drill new wells last month, according to the Colorado Oil and Gas Conservation Commission. This represents a drop of 96% from April 2019 when they submitted 522. In fact, net permits were at a negative, as producers withdrew 33 permits last month, a dozen more than were submitted.

On top of crude price declines and the coronavirus pandemic crushing oil producers' drilling plans, leading to lower associated gas production, higher ethane prices also look to dim production, according to Platts Analytics.

Ethane rejection was expected to bolster gas production in the DJ basin, potentially softening the blow from falling associated gas production. However, ethane prices have increased, which should drive ethane recovery and thus accelerate natural gas declines.

Ethane demand is expected to grow from US Gulf Coast steam crackers, causing ethane prices to remain above natural gas on a $/MMBtu basis, according to Platts Analytics. Meanwhile, ethane recovery out of oil-rich plays such as the DJ basin could strengthen as operators elect to meet minimum volume commitments on NGL pipelines. This combined with falling wellhead production should eat into natural gas production volumes at processing plants.

The region can't look to Wyoming's Powder River Basin for production growth. Outside of the DJ, the Powder River has stood as the only Rockies play demonstrating natural gas growth for the last few years. However, rig count in the Powder River has collapsed at a more dramatic rate than the DJ. Powder River basin rig count sits at six, the lowest level since March 2017. Rig counts have fallen by nearly 65% since March 4, according to Enverus.

Lower production expectations have bolstered balance-of-summer pricing at Colorado Interstate Gas, with basis up more than 20 cents over the last month, as the remaining summer strip sits 28 cents/MMBtu below Henry Hub. Rockies basis should remain strong as lower regional production forces the region to balance by reducing flows to neighboring markets.