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Sustained $30/b price could risk 400-800 MMcf/d decline

Permian Basin unlikely to see declines in associated production

Rising gas-to-oil ratios support associated output in other basins

New York — The rout in global crude oil prices this week is unlikely to show an immediate impact on US associated natural gas production, but if sustained, could keep domestic output flat to modestly lower this year.

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On Monday, the NYMEX prompt-month WTI crude price tumbled more than $10/b, or nearly 25%, settling at just $31.13/b, S&P Global Platts data shows. In early trading Tuesday, the US benchmark oil index had retraced some of those losses, moving in the mid-$33/b area.

The crude market's selloff, which started in late February amid mounting concern over the coronavirus outbreak, was exacerbated Monday following a move by Saudi Arabia to slash the kingdom's oil price in response to weakening market conditions.

Market jitters over the possibility that coronavirus could cripple demand in global energy markets, have yet to show a meaningful impact on gas prices, though.

On Tuesday, the NYMEX prompt-month Henry Hub gas contract was up more than 10 cents, trading near $1.90/MMBtu, or its highest since late February. The Platts JKM, the global benchmark price for LNG delivered to Northeast Asia, was assessed at $3.30/MMBtu Tuesday – up from record-low levels near $2.70/MMBtu last month, S&P Global Platts data shows.

ASSOCIATED PRODUCTION

As US oil producers grapple with narrowing and possibly negative wellhead margins in the months ahead, any sudden decline in liquids drilling or production would be unlikely to cause a commensurate drop in associated gas production, according to a recent analysis from S&P Global Platts Analytics.

In a worst-case scenario, sustained oil prices around $30/b could see total US gas production decline modestly through December, falling some 400 to 800 MMcf/d from its current level around 91.2 Bcf/d.

Stickiness in associated gas production is attributable to various factors but stems primarily from the performance profile of the typical unconventional well. According to Platts Analytics, gas-to-oil production ratios tend to rise over the lifetime of an individual well.

In the Permian Delaware, for example, a newly drilled well yields about 2.5 to 3 Mcf of gas per barrel of oil produced. At a well age of 12 months, though, that ratio typically rises to about 4 Mcf/barrel.

In 2016, a sustained decline in oil prices saw combined production from the Permian, Eagle Ford, DJ, Bakken and SCOOP/STACK fall by some 300,000 b/d year over year to 4.8 million b/d.

While gas-to-oil ratios have actually increased since 2016, a similar aging-well production effect allowed combined gas production from those basins to rise some 100 MMcf/d over the same 12-month period.

In the Permian Basin particularly, Platts Analytics also expects gas output to remain more insulated from declines this year. In addition to comparatively lower wellhead breakeven prices, which should keep oil production strong through 2020, Permian producers also currently flare about 500 to 800 MMcf/d – volumes that could be captured to replace other declining production in the unlikely case that oil drilling is curtailed.

MARKET IMPACT

Modest decline in US oil and gas output this year could provide a boost to the industry's dry producers. According to Platts Analytics, even modest declines in output could tighten year-ending storage balances by some 100 to 250 Bcf, leaving the market significantly tighter next winter.

In the forward market, though, that possibility has yet to show an appreciable impact on gas prices. On Monday, the Henry Hub January 2021 calendar-month contract was assessed at $2.58/MMBtu – up just 12 cents from a record low in late February.