Viewpoint: Winter gas prices put heat on producers

OREANDA-NEWS. December 24, 2015. The drop in US winter natural gas prices to more than 15-year lows could stoke additional gas use into 2016 and prompt producers to pare back output.

Spot prices at the Henry Hub have dropped in December to an average of \\$1.89/mmBtu, down by 47pc from a year earlier, while prompt-month prices at the US benchmark has plunged to near \\$1.75/mmBtu, the lowest since 1999. Prices for January delivery are the lowest in more than 20 years.

Gas prices are languishing amid record-high inventories, rising production and new pipeline projects that should help alleviate constraints in the Marcellus shale, allowing more gas to reach an already glutted market.

Those low prices are a boon for gas consumers who will pay less for electricity or to heat their homes. But it is making the going tougher for large producers that would usually see prices rise on winter demand and opportunities to hedge future production. This year has offered no such relief because winter cold has yet to show up.

Low winter prices "are a firm break from the past" and prices are running well below \\$2.50/mmBtu, the level where producers can increase output within cash flow, Guggenheim Securities analyst Subash Chandra told Argus. In addition, that price is also where many northeast producers can boost output from the Marcellus shale, the key driver of US gas growth.

The US Energy Information Administration (EIA) said last week that gas prices from October 2015 to March 2016 will probably average \\$2.47/mmBtu, down from \\$3.35/mmBtu last winter, according to the agency's Short-Term Energy Outlook.

Henry Hub prices have dropped from about \\$2.80/mmBtu in early August to below \\$2/mmBtu, taking the "last drop of cash flow" away from producers coping with a downturn in oil prices, said David Pursell, managing director of the energy investment bank Tudor Pickering Holt. Prices are unlikely to recover quickly because of high inventories and expectations for a warm winter that could spur some "preemptive selling" of assets, he noted.

Southwestern Energy, a top US independent gas producer, in October 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 Southwestern chief executive Steve Mueller.

The company is marketing some assets in the Marcellus shale, its key operating area and the top-producing US gas field, and 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.

Low prices could also lead to a more pronounced downturn in drilling activity. The gas rig count is down by about half from a year earlier.

Cabot Oil & Gas has curtailed its Marcellus activity this year 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 600mn cf/d Constitution pipeline is scheduled to begin service.

But low gas prices have led electric utilities to dispatch more gas-fired power at the expense of coal-fired generation, helping to balance the US gas market. Electricity from gas surpassed coal-fired power from July to September because of sustained low prices, the EIA said. Gas consumption for power generation is forecast to rise this year by 19pc from last year. Gas use in the power sector should slip by 2.3pc to 25.86 Bcf/d (733mn m?/d) in 2016 but remain 3.5 Bcf/d higher than in 2014.