US Lower 48 Gas Production: Can Gas Producers Prevent a Price Crash?

Over the last year, WTI and Henry Hub prices rose to levels the market has not seen in years. These prices have done their best to lure producers away from their unwavering commitment to capital discipline, but producers have yet to abandon ship. Fortunately for producers, improved well efficiencies have allowed them to capitalize on higher pricing as L48 gas production hit record highs this summer. BTU expects 2023 annual average gas production to increase 3.7 Bcf/d, but 2023 is limited on demand growth and will lead to an oversupplied market. The forecast calls for a flattening of Haynesville production in 2023 and a drop in prices to bring the market to normal storage levels, but if the Haynesville doesn’t respond as expected, the US market could have an additional 1.1 Bcf/d of gas to manage.

For this Energy Market Insight, BTU ran several scenarios using the BTU Client Forecasting Tool to test the bounds of the forecast. These scenarios were based on the following questions:

• What needs to occur for production to be flat to 2022 levels?
• What needs to occur for production growth to be 75% of BTU’s forecast?
• What needs to occur for production growth to be 60% of BTU’s forecast?

As BTU expects activity to decline in 2023 following weakening prices, the forecast calls for wells to sale to be flat at ~950 wells per month between 2023 and 2025. For production to be flat in 2023, the market would require a significant reduction in activity, falling ~120 well per month to 830 wells to sale per month. While the 13% decline in wells to sale may seem minor, the number of forgone wells is equivalent to the number of wells the Eagle Ford brings to sale every month. Therefore, in the extreme case of flat production, the market would be eliminating an entire basin’s worth of wells for the next year. In the case of reducing production growth by 25% and 40%, activity would need to decline to 860 and 840 wells to sale per month, respectively.

Lower 48 annual average production in 2023 ranges from 101 Bcf/d in the flat production case to 103 Bcf/d in BTU’s forecast. Carrying these scenarios forward, the spread of production possibilities increases from 1.4 Bcf/d in 2023 to 4.6 Bcf/d in 2025. This suggests the timing and size of an activity adjustment has the ability to swing future production by almost 5 Bcf/d, giving producers a lead role in determining how weak Henry Hub pricing gets in 2023 and 2024.

From a production standpoint, all four scenarios show there is little to be done to affect storage for this coming winter. However, holding all else equal, a reduction in activity could have a material impact on storage in 2023 and 2024. The flattening of Haynesville activity in BTU’s forecast allows for the market to hit normal storage levels in 2023; however, the continued strength in supply leads to a sizably oversupplied market going into Summer 2024. In contrast, if production were to hold flat through 2024, the market would remain within normal bounds in 2023, but exit Winter 2023/24 below the average of the last 12 years and be the lowest level since Winter 2018/19. Both the flat production and 60% of growth scenarios would lead the summer 2024 inventories below the normal range, which would be bullish for Henry Hub. Historically, producers have drilled into price spikes, which inevitably leads to a price crash. While operators remain capital disciplined, their well improvements are currently leading them down a similar path. With limited near-term demand growth, producers are currently driving the ship, and the growth path they choose will ultimately influence the strength of Henry Hub pricing.

This analysis was completed using the BTU client tool. To get more information on how you can run your own production scenarios in minutes, request a sample of BTU’s production forecasting tool. Also, to see firsthand how the Henry Hub view changes under different scenarios and to hear about the other factors BTU analysts expect to influence the market, join us November 2 at 2 pm ET for BTU’s upcoming webinar: Are U.S. Natural Gas Prices Poised for a Crash?

BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.