Conventional wisdom around town has quoted $5 as the natural gas price needed to increase production.
But April’s numbers may be proving this wrong. Production appears to be creeping up slightly, even though the Henry Hub price has dropped from about $4.50 per million British thermal units in mid-April.
Domestic natural gas production was slightly more than 2.09 billion cubic feet in April, a little lower than the previous month’s 2.15 billion cubic feet, but higher than the 2.065 billion cubic feet produced in April 2012, according to a report released Friday by the U.S. Energy Information Administration
“We assume when the prices get to $4.50 the rig count will respond and we will see some modest growth in gas production,” said David Purcell, an analyst with Tudor, Pickering & Holt. “Two things happen at $4.50-gas that are bad for $5 gas. One, the rig count will go up, and at $4.50 gas, some coal fired power generation becomes economic. It feels like there is a pretty firm lid of gas production at the $4.50 level.”
Rig counts have declined in shale plays and many producers have shifted their strategy to emphasize liquids-rich plays, but even so, natural gas production has remained stable.
“It doesn’t take a lot of activity to keep production flat,” Purcell said. “There is a lot of associated gas being produced from liquids drilling,” noting that increased production in the Marcellus and Utica shales in the Northeastern United States has helped boost natural gas production.
Tudor, Pickering & Holt called the April flat production levels “disappointing.” And it still predicts that production will drop a full percentage point by the end of the year from its 2012 level in response to natural gas prices that are lower than what many analysts believe is necessary to support further production growth.
However, the stubbornly consistent production levels fly in the face of those who have said that production will significantly drop in response to the less-than-five-dollar prices.
“This data trend is certainly silencing the “big decline” crowd,” Tudor, Pickering & Holt wrote.