Wednesday, August 21, 2013

Natural Gas Production Estimates from the EIA

Each month the U.S. Energy Information Administration reports historical monthly natural gas production data as part of the Natural Gas Monthly Report.  They also issue forecasts in the monthly Short Term Energy Outlook.Like most private analysts, they underestimated the growth in shale gas production. 

Because so much capital is being committed to natural gas drilling in north america and prices are so depressed, accurate forecasting of future production is critical.  Several pieces of the old formula appear to be broken, as rig counts have fallen, prices have fallen, and still production grows month after month.  Many one-time factors have been blamed for the disconnect:
  • Materials were in short supply so completions were delayed.  From pipe and casing to frac sand, the industry was often short.
  • Completion crews and pressure pumping capacity.  This definitely delayed completions and created a large inventory of non-producing wells.  This varied by basin.
  • Gas treating capacity.  The construction of cryogenic processors to strip liquids is lagging production in new basins.
  • Pipeline takeaway capacity.  Well known, self explanatory.
As gas storage surpluses were worked off in the spring of 2013, many were eager to bet the turn, and producers were certainly ready to receive their beautiful reward after suffering the pain for so long.  Analysts and CEOs were comfortable declaring that the fix is in, and low prices cured low prices etc...  Consensus forecasts for Henry Hub were into the $4's for the latter half of 2013 and beyond.

At $3.45 today and facing the possibility of record storage breaching 4 TCF in Nov, consensus is falling and the 2014 Strip is at $3.89.  More forecasts are acknowledging further production growth in 2014.

What is the EIA saying?  Two graphics.  The first is historical marketed production, and EIA's most current projection through Dec 2014.  It calls for further increases, with some monthly noise for hurricanes and maintenance.  The second graph shows the evolution of the EIA forecast for Dec '13 production.  They first issued estimates in January 2012, so we have the original estimate and 19 monthly revisions.  The trend will be evident.

What is the point?  The point is that acceptance of the shale gas revolution has been so reluctant, and underestimated time and again.  And the point of that point is to ask, "Are we still doing so?".  Drillers continue to find more gas, faster, cheaper, and more quickly to market.  The slope of the learning curve doesn't seem to be flattening out quite yet.  And something smells fishy about the broad consensus that production has plateaued.  That is a distinct possibility, but perhaps not so certain.

Be careful on this next graph.  Every data point is the same month, December 2013.  Only the production forecast has changed, and by a lot, over 20 months: