US shale producers keep on pumping, despite price slump
US natural gas production hit a new record in August, despite the deepening slump in gas prices and a fall in the number of rigs targeting gas formations.
The failure of gas production to respond to lower prices and a falling rig count has left many analysts wondering if it heralds the same problem in the oil market - worsening oversupply.
The number of rigs drilling for oil has plunged almost two-thirds over the last 12 months, but crude production is unchanged since October 2014 and down by less than 5pc compared with its peak in April.
Like shale gas producers, shale oil drillers have managed to raise output while cutting costs by concentrating on the best-known and most productive formations and areas.
They have also standardised and accelerated the drilling process, drilled longer horizontal wells with more fracking stages, and employed more horsepower to fracture larger areas underground from the same hole.
But closer examination reveals important differences between the two markets that suggest oil output will be less resilient than gas to lower prices.
The United States produced 2.5 trillion cubic feet of gas in August, up 7pc compared with the same month in 2014, according to the US Energy Information Administration.
Output has become progressively disconnected from prices and the rig count since the eruption of the financial crisis and onset of the economic downturn in 2008 and 2009.
The number of rigs drilling for gas has dropped by more than 85pc, from over 1500 in October 2008 to fewer than 200 in October 2015, according to oilfield services company Baker Hughes. But over almost the same period gas output has grown by 766 billion cubic feet per month, or nearly 45pc, according to the EIA.
The disconnect has piled pressure onto natural gas prices as the market struggles to absorb the enormous flood of extra molecules.
Continued production growth, coupled with a mild summer and a slow start to the winter heating season in 2015, has pushed the amount of gas in storage to a record level.
Front-month gas futures briefly slipped below $2 per million British thermal units last month for the first time since April 2012, and before that since January 2002. Continued increases in gas production have been entirely attributable to output from the stacked Marcellus and Utica shale formations in the northeastern section of the Appalachian Basin.
Three states overlying the northeastern section of the basin - Pennsylvania, Ohio and West Virginia - have seen their combined output rise 11-fold since the start of 2010 to more than 600bn cubic feet a month.
The superb production characteristics of the Marcellus and Utica shales have transformed the gas industry and eclipsed earlier shale plays such as Barnett and Haynesville. But the Marcellus/Utica situation is exceptional and it is not obvious that there are any similar oil-rich shales which could keep oil production growing despite the sharp drop in prices.
Unlike natural gas production, oil output has slowed and turned down in response to the halving of prices since mid-2014, and will continue to fall as long as prices remain below about $60 per barrel. (Reuters)