Some U.S. natural gas producers are shutting in their production as prices drop below levels where they believe they can be profitable.
Chesapeake Energy, one of the largest gas suppliers, said for the second year in a row it would cut drilling and production levels in response to falling natural gas prices.
And firms Questar, Ultra and Shell have shut-in about 230 million cubic feet a day of production in the Rockies due to low natural gas prices, which hit $5.60 at a key Rockies trading hub, according to Tudor Pickering Energy Partners. This is the second year in a row this has happened, but it’s a month earlier than last year. The Pickering guys note:
FYI – how soft is Rockies gas? At / below $1/mcf in some spots. Come on Rockies Express expansion. Competing for pipeline space is no fun.
Natural gas supplies have shot up to what many observers are calling record levels, driving down prices and putting pressure on the companies that extract and produce the fuel. Prices have fallen from more than $8 in June and $7 as recently as mid-August to the $5.50 range in recent days.
AP quotes a report by JPMorgan analyst Joseph Allman (that I haven’t seen yet this morning):
We think that current natural gas prices are unsustainable in the current service cost environment (i.e., many producers are destroying value at today’s gas prices) and we think (Chesapeake) is attempting to do its part to balance the gas market.
Will the cut back have longer term implications, asks Team Pickering?
CHK [Chesapeake] cutting 15-20 rigs isn’t particularly problematic (US land count 1730 last week), but question is whether other E&P activity reductions will follow as/when/if gas market stays soft. We’ve modeled it that way..but hard to gauge E&P resiliency / sentiment and willingness of OSX investors to look beyond.