Nat gas price plunge clouds future for producers

OREANDA-NEWS. November 03, 2015. The recent plunge in natural gas prices is creating an uncertain future for producers already facing the prospects of a mild winter, record inventories and rising output.

Prompt-month gas prices at the start of this week fell, dropping briefly below \\$2/mmBtu and their lowest settlement in more than three years. The sharp decline signaled that traders were making a quick exit from the November contract ahead of expiation as opportunities for a winter rebound faded.

The market pessimism over rising prices underscores a growing glut of US production. The US natural gas market is not without its bright spots for producers: Demand for low-cost US gas in Mexico is growing, power sector gas use hit new highs in 2015; and LNG exports could start up later this year. But that additional demand, resulting from sustained low prices, will not arrive soon enough for gas-focused producers.

Southwestern Energy last week said it would seek a joint venture partner instead of hedging its gas output.

"We do not see much value in locking in the price where it is today," said Steve Mueller, chief executive of Southwestern.

The company is marketing some assets in the Marcellus shale, its key operating area and the top-producing US gas field, and in other ventures for \\$300mn in carrying costs and a cash bonus. Southwestern's partner would share the risk of development during the downturn for an opportunity to participate in a tighter market in the future.

Cabot Oil & Gas has already curtailed its Marcellus output for the last six months to cope with low prices. The independent plans to drop its Marcellus rig count by the end of the year to two, down by one rig. The company may not boost drilling activity again until late 2016, when the 650mn cf/d Constitution pipeline is scheduled to begin service.

That project to bring gas to the northeast has hit some regulatory snags and could face permitting delays.

More widespread pullbacks in gas field development could occur if producers pare spending to reflect lower prices. Operators in the Haynesville and the Marcellus shales could idle another 30-40 rigs, according to the energy investment bank Tudor Pickering Holt. The cutbacks could curb gas production growth in 2016 by 1 Bcf-1.5 Bcf/d (28mn-42mn m?/d).

But emerging gas demand could help balance the market in late 2016 as exports from LNG terminals on the Gulf coast and pipelines to Mexico provide an outlet for the deluge of gas.

Analysts with Simmons & Company estimates that slower production growth and a projected 3.1 Bcf/d of new demand will come on line next year, according to a research report this week. The increased demand and slower production growth could help balance the market by late 2016.