Appalachian Natural Gas Supply and Demand Economics (latest May 2016)

Appalachian gas production has risen 2.51 BCF/day in the last 3 months for which EIA data is available (Dec - Feb). This is likely due to more backlogged wells being completed and turned in line. Several companies (Consol, Range, Cabot, EQT, and others) stated that they would accelerate completing and turning in line backlogged wells or continue turning in wells after drilling. Increased pipeline takeaway capacity since late summer 2015 with the REX pipeline and others has allowed more gas to be transported out of the basin. The negative basis differential has eased just a little overall and Henry Hub prices are up from the previous lows. Gas futures show a significant differential of a dollar or more going into next winter. Rig counts have dropped below historic lows and now most of the production coming on line is from backlogged wells: DUCs (drilled uncompleted), COBs (completed on backlog - often due to pipeline availability), and pinched back production - either due to pipeline constraints or reaction to poor pricing. Bentek data suggests production after Feb. (the latest EIA monthly data available) will begin declining again. Some analysts think the backlogged wells, (DUCs, COBs) and pinched production, will return to normal backlogged inventory levels by Feb. 2017. With very few rigs running and delays of about 3 months or more from drilling to producing on multi-well pads, this suggests that there would need to be a surge in drilling by Nov. 2016 to prevent possible 2017 shortages after Feb. Increased demand is expected through the summer with more natural gas powering electricity. This will also occur in the winter and if it is a cold winter the potential shortages in 2017 may be exacerbated. More pipeline takeaway capacity is expected in 3Q 2016 onward and LNG exports are slowly ramping up. Associated gas from oil plays is not rising as it was, while conventional gas production continues to decline. Capital expenditures are significantly down even from the lows of 2015. Equity is still constrained in the market with current prices below breakeven in most areas. The question is whether, and if so, how many companies will attempt to anticipate a gas price recovery by drilling new wells ahead of it.