The US energy market has been buzzing with low crude prices and anticipation of pipeline projects out of the Northeast to support a highly constrained gas market. However, it is important to take a look at gas outside of the Northeast as well. Since oil prices have crashed and natural gas prices have remained weak, natural gas production outside of the Northeast has also seen a dramatic shift. Liquids prices are no longer bolstering up economics in areas like the Eagle Ford, Permian, and Bakken, which has significantly slowed drilling and completions in these areas, resulting in both oil and gas production declines. Outside of the Marcellus and Utica, gross natural gas production in the Lower 48 is expected to decline from a peak of 62 Bcf/d in 2Q 2015 to 57.2 Bcf/d in late 2017 and into 2018.
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This decline is driven by basins all over the country. However, due to the large amount of associated gas from the Big Three US shale oil plays: the Permian, Eagle Ford, and Bakken, low crude oil prices have become the best ally for natural gas prices and dry gas focused producers. The chart below highlights the trajectory of associated gas production from the Big Three in the fall of 2014 based on peak drilling activity (projection), compared to BTU Analytics’ September 2015 outlook (See Upstream Outlook). Declines in drilling and completion activity will trim out almost 3 Bcf/d of liquids-rich natural gas supply by the end of 2016.
As producers slow down drilling in liquids-rich areas, the lower amounts of associated gas are also impacting the outlook for US natural gas liquids (NGLs). Under our current forecast, BTU Analytics expects NGL production in the Lower 48 to be has much as 400 Mb/d lower than would have been expected if peak drilling activity last fall had continued at its blistering pace.
The correction in crude pricing may pull enough wet gas out of the market to incentivize a recovery in ethane and propane pricing. With more than 10 million mt/year of new steam cracker capacity under development it is no longer a pipe dream to talk about ethane price recovery in this decade. Additionally, petrochemical demand for exports of natural gas liquids continues to ramp up, providing an a relief valve for supply over the coming years.
A small aside – this marks BTU Analytics’ 100th Energy Market Commentary article! Thanks to all the readers who continue to make this a success. As always, we welcome your feedback, questions, and comments in response to our analysis.