Natural gas exploration and production (E&P) companies in the Haynesville Shale continue to drive overall cuts to Lower 48 supply. Output there is down nearly 20% from a year earlier and continues to slide following well-telegraphed efforts to slow activity and balance an oversupplied market.
Prices, however, have yet to respond, given a substantial supply overhang. Natural gas in storage remained lofty relative to historical norms following a winter in which seasonally mild weather sapped heating demand. Weak consumption during the winter months intersected with production that reached record levels around 107 Bcf/d at multiple points – before the E&P pullback commenced in February and March.
Total output has since dipped to about 100 Bcf/d, and at times in recent weeks, it fell below that threshold.
Production in the Haynesville held just shy of 10.2 Bcf/d on Thursday, according to Bloomberg estimates. That was down 19.9% from a year earlier, with the cuts coming over the past two months. It marked the steepest year/year drop of any major gas-producing region. The seven-day Haynesville average was down 1%.
Benchmark futures and cash prices, however, have yet to shift into a sustained rally mode in response. New York Mercantile Exchange front month natural gas futures have consistently held below the $2.00/MMBtu level through the spring in large part because of hefty storage levels. Henry Hub spot prices averaged $1.455 on Thursday, for example, down from around $2.200 a year earlier, according to NGI data.
NGI price analyst Josten Mavez said through Wednesday (April 24), Henry Hub spot prices this month averaged $1.61, while estimated Lower 48 production averaged 99.4 Bcf/d. Compared to the entire month of April 2023, daily cash was down 55.0 cents.
“The difference from this month to the April five-year average is even wider, with cash down $1.35,” Mavez said.
The U.S. Energy Information Administration (EIA) on Thursday reported an injection of 92 Bcf into underground storage. It lifted inventories to 2,425 and put stocks 37% above the five-year average.
Rig Count Dinged
Lower Haynesville production – along with summer demand – could eat into that surplus.
“Low natural gas prices have continued to hurt rig count in the gas-directed Haynesville,” RBN Energy LLC analyst Jeremy Meier said. The trend showed no signs of reversing, he said, noting the tally fell by 11 in a 90-day period through the week ended April 19.
EIA analyst Naser Ameen said both an abundance of supply and economics explain why the Haynesville is leading the downshift in production. The region, spanning North Louisiana and East Texas, last year accounted for 13%, or 16.8 Bcf/d, of gross natural gas withdrawals. That marked a 1.4 Bcf/d increase from2022. During 2022, Haynesville gas output swelled by 2.1 Bcf/d.
What’s more, Ameen noted, production costs depend in large part on drilling expenses. The Haynesville formation is 10,500-13,500 feet deep, much deeper than other formations such as the Marcellus Shale in Appalachia, which is 4,000-8,500 feet deep. As such, it is more expensive to drill in the Haynesville and, therefore, its economic viability is more vulnerable to low prices.
The higher drilling costs “played a role in reducing rig activity and subsequently slowing production,” Ameen said.
The price drops this year continued a downward trend. Henry Hub spot prices averaged $2.54 in 2023, far from the $6.42 average in 2022.
A pipeline sample from the ArkLaTex region by East Daley Analytics fell 2 Bcf/d over a recent two-month period ended April 14. Most of the declines were in Louisiana, but the firm’s East Texas sample dropped by 500 MMcf/d as well.
“Supply has fallen so quickly that producers are failing to deliver gas nominated to pipelines,” East Daley analyst Oren Pilant said.
He noted Energy Transfer LP’s ETC Tiger Pipeline issued multiple critical notices of underperformance in April, citing unexpectedly low deliveries from several gathering system interconnects. ETC Tiger, which typically moves 2.3 Bcf/d from the Haynesville to the Perryville hub in Arkansas, has reported more than 300 MMcf/d in declines month/month, Pilant said.
Most notably, major producer Chesapeake Energy Corp. earlier this year launched a plan to slow the start of new wells and to drop a rig and fracturing crew in the Haynesville.
Pilant said “the sharp declines in the ArkLaTex are a result of producers managing supply in a dreadful price environment, rather than any issues with geology.” Chesapeake and other E&Ps, he added, “are choking back wells to limit exposure.”
