Texas Railroad Commission Reports Rise in Drilling Permits for June '17

The Texas RRC released its drilling, completion, and permitting statistics for June this week.  Total new permits topped 1,200 for only the second time in years, with combo (oil+gas) and oil wells leading the charge.  Gas well permits were also up, but only represented 70 of the permits issued.

It's notable that new well completions still have not begun to follow the upward trend in permitting.  Whether that is tardy reporting, or maybe DUC count is rising, it suggests that unless many of these permits are being delayed or abandoned, we will eventually witness a surge in completions, and therefore production.

Gas new-drill completions reported in June were just 68, and oil completions were 446:

Western Hydropower Surplus Fading Quickly

The record snowfalls and subsequent runoff in the Pacific Northwest has led to massive electrical output this year, but the effect is wearing off suddenly and quickly.

In June, the surplus generation over 2016 was equivalent to about 1 BCFD of natural gas.  But June's average hydro output of 12.8 GW has fallen to 8.6 GW as of yesterday, and should generally decline further throughout the month.  

This should reduce exports to California, which would in turn increase thermal generation there.  Thermal output in CAISO has been badly lagging prior years up to now:

Nuclear Power Closes Output Gap

Electricity output from nuclear power plants fell below 2016 levels in mid March, and the gap has averaged more than 1 BCF of natural gas equivalent since then.  But the extraordinary maintenance and repair season is finally wrapping up, and as of today output is back above 2016 levels.  This represents an important loss of incremental demand for natural gas at a time when it is struggling in the power sector against low aggregate demand, mild weather, renewables, and cost competition against coal.  

Fossil Fueled Electricity Pie is Shrinking

Renewables are driving gas out of the dispatch curve in most major power systems across the US.  Out west, solar is the driver.  Everywhere else, it is primarily wind.  Renewables are benefiting from learning curves, price advantages, legislation, subsidies, growing awareness/favorability, and supporting technologies.  I think the hope for fossil fuels was that the pie itself (load) would also be growing.  The hope for natural gas was also based on some well known advantages over coal.  

However. 

The reality is a story of victimization by success combined with economic stagnation.

Wind is the pupil at the head of the class.  It is doing so well, especially in ERCOT and Southern Power Pool.  It has seen rapid installation and a steadily rising capacity factor.  

Here is one small illustration.  With large YOY increases in wind output, Southern Power Pool is generating more non-fossil power (mostly wind).  With wind averaging almost 12GW of output for the last four days (a big new record), the running 30 day average output for non-fossil fuels has held well above the prior year average all through 2017: 

and with gas taking less market share from coal, due primarily to price differential:

It will be hard for natural gas demand to rise to the levels seen in prior years under these circumstances, especially if total electric demand stagnates, which seems to be happening almost everywhere.

It will take special weather or something more dramatic (curtailment of the nuclear fleet?) to light a blue flame under natural gas at this point.  Supply is promising to overwhelm in Q3-4 as well (maybe that won't materialize?), so the $2's may be the new home for Henry Hub.  LNG is ramping up but it's slow and a known quantity.  Supply disappointment is most likely to come in the form of temporary delays, so a price catalyst may be lacking for a while.

Pacific Northwest Hydro Generation Poised to Overwhelm

Hydro output in Bonneville Power Admin has averaged 12GW this month, against last year's 10GW.

June output last year dropped off quickly, averaging below 9 GW.  This year could dwarf that, with river levels high and forecasts for demand low in the West.  Power will be moving south to California, and the little bit of gas fired burn that is still in the dispatch curve in CAISO will fade further unless heat moves in quickly.

Coal to Gas Switching in MISO Region Fades as Nuclear Reactors Return to Service

Weekday market share for natural gas has been strong over the last six weeks in MISO, but the single biggest factor driving that is nuclear capacity factor.  Nuke capacity factor has been well below the prior year for April and May, with average output around 200 GWHD this year, vs 280 last year.

As nukes ramp back up, gas should fade from the mix.

Nuclear Power Output Begins Recovering, But Not Quickly

Nuclear power output rose to an 80.9% capacity factor today, but is running more than ten points below the prior year.  That equates to about 2 BCFD of natural gas replacement value.  This extreme differential should only persist for another two weeks or so, when the gap will begin to close with the end of maintenance season.  

Haynesville Shale Production Turns Upward Again

The Louisiana state oil and gas reporting system shows well by well production, usually about 3-5 months lagging.  Based on the operators who have reported monthly production, February shows the first significant uptick in production after a long decline and plateau.  All the gains are in De Soto Parish, in fact.

With the rapid rise in working rigs, the Haynesville is likely to see gains for some time, perhaps returning to it's 7 BCFD glory next year if activity continues ramping up.  

Nuclear Power Capacity Factor Rising But Not Quickly

Nuclear power reactors are returning to service, but they will need to ramp up quickly starting tomorrow if they are to close the near 1 BCFE gap with May 2016:

MISO Natural Gas Power Burn Loses Ground to Coal

So far in May, gas is taking a 28-38% market share against coal's 62-72% of thermal generation.  Unfortunately the curve is steeper than last May also, so gas takes a lower share of lower load days, and load has been light.  To make matters a little worse, a temporary opportunity to increase thermal output due to nuclear outages will go away soon.  

Another Giant Leap Forward for ERCOT Wind Power Generation

ERCOT released its Demand and Energy Report for April 2017 this week, and wind power posted another record, up 47% over last April, and within 25% of both Natural Gas and Coal in total generation.  It averaged about 9 GW for the month:

Meanwhile, natural gas lost market share to coal in ERCOT:

Texas Oil and Gas Well Permitting Activity Declines in April

Despite relentless increases in rig counts, Texas RRC reporting a decline in well permitting in April.

Combination Oil/Gas well permits declined from 893 in March to 576 in April.
Oil well permits declined from 284 to 223.
Gas well permits declined from 56 to 55.

Nuclear Power Output Lagging 2016 by 1 BCFE

As the maintenance and refueling season approaches an inflection point this week, output from reactors is currently about 1 BCF-gas-equivalent  below last year.  As the graph indicates, reactors were rapidly returning to service in May 2016.  The same directional trend is evident this year, month-to-date.  

Southern Power Pool: Natural Gas Rapidly Gained Market from Coal in April

For multiple reasons, SPP has been using substantially more gas and less coal this month.  Even though total generation, and thermal generation, are not up but down, the dispatch curve is suddenly favoring gas again.  Gas achieved its highest 1-day share in two years yesterday, at about 45% of the thermal power market.

As the heat begins to build, this trend will be important to track.  Last year gas was cheap.  Very cheap.  Until mid-summer.  This year, it seems that coal's price advantage isn't helping (In SPP specifically), so when that YOY comparison fades in June, will gas make new utilization highs?

Changes in MISO Natural Gas Market Share

Further to a previous post, higher gas prices and lower overall power demand have shifted the gas demand curve, and steepened the slope.  At lower aggregate demand, gas market share of carbon based power generation is much below 2016:

Nuclear Power Plant Outages Continue at Nearly 1.5 BCFED Over 2016

Nuclear power plant refueling and maintenance season continues with nearly 1.5 BCFED more power offline than last year at this time.  Outages should bottom out in the next two weeks as plants return to service for summer cooling season.

MISO Natural Gas Demand Struggles, as Total Demand Also Struggles

Total load in MISO this month remains anemic.  The lowest loads of the year, and the lowest April average load in many years, is holding down fossil fuel potential.  So far this month, there has not been a single day with load above the April 2016 monthly average!

With gas also losing market share to coal on price, usage of this hydrocarbon is down about 15% MTD. 

Natural Gas Inventory Builds Too Much

Today's natural gas inventory build of +54 BCF was above expectations, but gas didn't sell off too much, just down 2-4 cents.  

Inventories are high, but production has been stubbornly low.  Everyone is awaiting an expected surge in output, but projections continue to be revised lower, or rather 'later'.  

Exports have been price supportive, and imports from Canada, though high, are at the expense of Canadian storage inventories so it can't go on indefinitely.  

Losses of power burn market share to coal have been in line with consensus expectations, on the order of 3 BCFD so far this shoulder season.  Gas demand has been severely hurt by western hydro output, but helped by nuclear outages, both of which should persist for months (hydro more so).  

Natural Gas Storage VS Average

Here's another perspective on natural gas storage.  This is the relationship to the 5 year storage average.  Last year on this date, we were at the 5 year max, 679 BCF above the average.  This year, the anomaly has risen to 263 BCF from zero at Jan 1.

The grey region is the 5 year min-max deviation, which is revealing in that it shows how well the supply-demand balance guides inventories toward equilibrium by the end of injection season in November:

Alberta Gas Production Rises in April, Averaging 0.2 BCFD Above April '16.

Whether seasonal factors and timing, or a fundamental shift is taking place, TC Nova pipeline receipts in April are up from Feb and March, and are now above 2016 levels.

Output normally declines in May, and we will soon see whether the same pattern prevails in 2017.  If the higher rig counts are translating into more molecules, it could reverse the inventory trend we have seen since January:

Southern Power Pool: Natural Gas Market Share Declines in April (vs April 2016)

In SPP, a few bad things are happening for natural gas.  Total demand for carbon fueled power generation is down by about 2GW in April, and gas has lost market share to coal, from around 36-40% of thermal output last year, to 27-31% of thermal output this year.

The two primary culprits are (1) increased wind output and (2) higher natural gas prices.


Here are the poly lines for April '16 and '17, showing market share for natural gas:

The daily demand for carbon fueled power, with a 30-average line, for 2016 and 2017:

MISO: Gas Market Share of Thermal Generation = Down from 42% Last April to 34% This April

Much higher natural gas prices this year have made gas less competitive against coal in the MISO region.  MISO publishes excellent daily fuel mix statistics, unfortunately they also show that total load is down about 7% so far in April.  Most of that generation loss has been offset by declines in wind and nuclear output, but on average the wind will blow again, and nuclear power will return from maintenance.

Here's total output vs last year, for the last six months.  Load has been below the prior year in all but one month (December 2016).

ERCOT Reports March Fuel Mix

ERCOT's Demand and Energy Report for March 2017 was released yesterday.  It shows natural gas gained against coal:

But it also shows that the thermal power pie continues to shrink:

One big reason, besides low/no demand growth, is wind.  A big new generation record was set in March:

Texas Drilling and Permit Activity: Drilling Steady, Permitting Way Up

Completions have not yet accelerated, but permitting really took off in March, per the Texas Railroad Commission Drilling, Completion, and Permitting Report for March 2017:

Permits issued in March rose to 1,233 from about 930 in each of the three previous months (Mostly Oil permits, fewer Oil+Gas permits, and very few Gas permits:

Only 63 gas wells were completed in March.  Oil activity was much greater, at 475 new well completions, but still well below March 2016 (876 completions).

CONUS Winter a Bust. Now Almost 600 HDD's Below Normal

With winter drawing to a close in the continental US, the final verdict is very, vary warm.  Since Oct 1, we are nearly 600 HDD's below normal, and if next week's forecast holds, we will be on par with last year's warmth.

Nuclear Capacity Factor Drops Sharply, Requiring 1.5 BCFD+ of Extra Gas Power Burn

Substantial new outages over the weekend have resulted in a decline of over 3% in nuclear power output from Friday, and it equates to over 1.5 BCFD of gas replacement vs this date last year:

Lower 48 Oil Production

Today's EIA Weekly Petroleum Report shows an unsurprising continuation of the upward production trend that suggests we will keep rising for some time, perhaps breaking 10 million barrels per day by year's end.

Nuclear Power Output Stabilizes, Near 2016 Levels

As we move through refueling and maintenance season, nuclear power output levels should continue to drop, but the outages have not outpaced 2016 by much so far.  April should see larger year-on-year differentials, at least that's what is expected.

High Gas Prices Take Toll on Power Burn Market Share in MISO

The most recent two days (March 25 and 26) are in RED below.  Not only are total gas demand levels quite low, they reflect a loss of market share to coal of about 10 points vs last year:

Nuclear Refueling Begins: Large Drop in US Nuclear Capacity Factor Over the Weekend

Nuclear power output capacity factor dropped from 88% to 82% over the weekend, as units came offline.  That improves the power burn potential for natural gas, and a full gas replacement of the lost nuclear output would see about 1BCFD more gas being burned today than on this day last year.  This imbalance is projected to persist for some time.

MISO Coal to Gas Switching Snapshot: March 2016 vs 2017

Load-adjusted, gas is averaging about 5 points of thermal marketshare below last year in March.

The slope is also different, with market-share varying more directly with overall thermal load size.  With lower demand anticipated as weather moderates in the back half of March, the market share loss should be more pronounced, since thermal demand in the 8-10 BCFE range is showing a gas share around 37%, vs last year at 43%.

Compounding this loss for natural gas is the higher wind output experienced in MISO.  Average daily wind output is 185 GWH this month, vs 135 last March.  That's a MASSIVE difference, displacing something on the order of 400 MMCF per day.  (The increased wind output isn't just in MISO either, it is big in SPP and ERCOT)

Solar Power: Small Beginnings that Matter Quickly

Texas is late to the utility-scale solar power game, but keep one eye on these small beginnings.

It takes perhaps 120 GWH per day to displace a BCF of natural gas, so a tiny number like 6 GWH seems insignificant.  But capacity will grow quickly against a backdrop of low/no load growth, and say 20 GWHD still adds up to 60 BCF per year in gas offset.  With summer sun, and more capacity, coming quickly in the ERCOT region, this graph may take on an interesting slope soon....

MISO Natural Gas Market Share Continues To Steal From Coal

High loads have helped, but in general natural gas is regaining market share from coal since mid-February.  It is not just a few percentage points below 2016 levels, despite a higher market price.  This should help keep a floor under gas prices so long as weather doesn't abandon north america completely this summer:

Winter Heating Requirements Weak Despite Cold Spell

This winter is barely keeping pace with last year's anemic performance.

Through the 3/20 forecast period, we are just 67 HDD's ahead of last year (OCT-MAR), and a full 504 HDD's behind the 20 year average:

Western Canada Natural Gas Storage Surplus Eliminated

A combination of colder weather, higher exports, and lower production have more than eliminated the 40 BCF surplus that western Canada started the year with.  It is now a growing deficit, though weather is moderating quickly from here on out and the big daily storage draws should be history by mid-week.

Coal-to-Gas-to-Coal Switching in the Midwest (MISO) Region

We saw clear and prompt evidence of a switch from gas to coal as power generation feedstock in MISO when gas prices began their sharp rise in late NOV 16.  Then again when prices fell in FEB 17.

Now, with strip prices back above $3 (but HH Spot lagging at the moment), will we see a reversal back to coal domination?

Not yet.

Here are two angles on the question.  The first is the demand adjusted scatter plot, which is indicating that gas is within about 5% of the thermal power market share it held last March, when gas prices were below $2.

The second shows the daily market share of thermal power generation since last November.  Gas was at a 40% market share vs coal back in early November, and then dropped as low as 25% around New Year's Day.  It started rising steadily at the beginning of February, and was near last year's levels, around 40%, by March.  It's been maintaining a high 30's share, clocking 38.4% yesterday.

As higher strip prices translating into the spot market, shouldn't we see gas lose marketshare?