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The Rise of the Beast Slayer – Implications of Growing Associated Gas Production

December 6, 2018 | Charles Nevle

U.S. natural gas production growth in 2018 has been unprecedented. OPIS PointLogic is expecting growth this year of 8.8 Bcf/d, nearly double the largest annual increase ever seen historically. This year’s growth is part of a long-term upward shift in production going back to 2005, with just 2016 showing a drop. Until this year, that growth, since at least 2012, was built on the back of Northeast production, the Beast in the East, the Marcellus and Utica shale plays. This year, that dynamic changed, with less than half the growth coming from the Northeast.

This issue of Get the Point will address how U.S. drilling activity has shifted from dry gas plays to a bigger contribution from associated gas in oil-focused production, particularly out of the Permian Basin. We’ll also address limitations on how much gas demand can grow in the U.S., how much export markets can absorb, and how the constraints pressuring Northeast production growth are evolving.

Is it possible that the Beast in the East can be tamed, if not slayed, by emerging market conditions?

The graphic above depicts U.S. production on an annual average basis by region. The Northeast stands out as THE growth region since 2015, while everywhere else stagnated or declined. Another way to state this is that without Northeast production growth, Lower 48 (L48) production would have declined by over 6.0 Bcf/d between 2011 and 2017.

However, because Northeast production increased by an amazing 18.4 Bcf/d growth, the L48 saw an increase of 12.1 Bcf/d. On top of that growth, OPIS PointLogic expects the Northeast to grow an additional 4.0 Bcf/d in 2018, rivaling its largest growth year on record, 2014, which saw an increase of 4.3 Bcf/d.

But 2018 looks distinctly different than the last several years. Production growth in 2018 has been nearly an ‘all hands on deck’ story, with significant new volumes coming from Texas, as well as the Southeast, MidContinent and Western regions, in addition to the Northeast. As the graphic above depicts, 2018 stands out as a much different year than we’ve seen recently in the U.S. gas market. Instead of Northeast growth offsetting declines elsewhere, the U.S. production market was firing on all regional cylinders.

From one perspective, a perfect storm of good fortune hit the gas supply market in 2018. Producer activity in the Haynesville, Marcellus, Utica, Permian, SCOOP and STACK were all strong, at the same time that the market went into the year with fairly low storage inventories. In turn, those low inventories were supportive of natural gas prices and gave the market a place to put ‘excess’ supply.

Of course, strong domestic demand and a growing export market also helped considerably in maintaining high prices. Excluding December 2018, spot market prices this year at Henry Hub have averaged $3.04/MMBtu, close to a $0.07 increase from the same period in 2017 and $0.66 over the 2016 levels.

Turn Toward Associated Gas

Within this ‘perfect storm’, however, a strong undercurrent is taking place, a shift in the supply market towards associated gas production. With strong oil prices and the resulting favorable economics from drilling for crude oil versus natural gas, producer activity has shifted sharply away from dry gas plays to oil plays.

Since bottoming out at 398 in May 2016, U.S. rigs have risen by 672 to 1,070 rigs as of Nov. 30, 2018, with 585 of these additional rigs (87%) in non-Marcellus/Utica plays. The Permian picked up 355 of the 585 increase, or 61% of the associated rig growth. In fact, four associated plays make up a combined 86% of the associated rig growth: the Permian, SCOOP/STACK, Eagle Ford and Bakken.

This increase in drilling and the ensuing production growth has fundamentally changed the makeup of gas production in the U.S. Since 2011, associated gas production has tripled from about 7.5 Bcf/d to 22.0 Bcf/d, thus rising from 20% of the total makeup of U.S. production to nearly one-third of the U.S. supply stack (see graphic below).

The reason this shift is so important is because, in general, associated gas plays are not driven by gas prices, as their economics are all about oil prices. Gas is effectively a by-product. In many plays, producers would be fine flaring the gas if regulations permitted, if by doing so it meant they could produce more oil.

From a gas market perspective, this is ‘free gas’ that is dumped on the market. Of course, this cheap gas makes it harder for producers who are dependent on gas prices to find a place in the supply stack.

Going back to rigs, the non-Marcellus/Utica, non-associated gas play that has seen the most attention is the Haynesville. Since its low point in May 2016, 36 of the 49 rigs that have been added to this sector since have been in this play. As associated gas production continues to increase, the Haynesville will, once again, be crowded out of the gas supply stack.

Here is the challenge: L48 total demand, including the export markets, is expected to reach 89.1 Bcf/d in 2018. Along with our colleagues at IHS Markit, we expect this demand to increase by 7.9 Bcf/d by 2020.

Accordingly, L48 gas production is expected to increase by 8.1 Bcf/d over this same period. That is a lot of growth, but where will it come from and who will get crowded out?

Permian Hemmed In – For Now

The rapid increase in oil and gas production arising from the relentless drilling activity in the Permian Basin has taxed the midstream’s capability to move gas and oil out of the region. The results of this constrained capacity are evident in the discounted prices for both Permian gas and oil. Regional oil prices have been trading recently at about a $15/barrel discount to the benchmark West Texas Intermediate (WTI) price index, while spot gas prices in the Permian region have been recently trading at more than a $3.00/MMBtu discount to Henry Hub.

A slew of new pipelines on the oil and gas side are expected to relieve this congestion, but, aside from the expansion of Sunrise Oil Pipeline by Plains All American which came into service in early November, these pipelines don’t come on in force until late 2019 and 2020. About 13.0 Bcf/d of natural gas pipelines are being tracked in the OPIS PointLogic pipeline data base and Texas/Southeast Weekly Report, with in-service dates between October 2019 and December 2020.

Until these gas pipelines come online, Permian gas production growth will be limited. But when takeaway capacity is available, Permian production will increase rapidly, with most of the new greenfield pipelines scoped out at about 2.0 Bcf/d each.

In the short term, the pause in Permian growth will allow continued growth in other regions. But watch out: when the bottlenecks are relieved, the growth from Permian and other associated gas plays will create a hostile environment for other growth regions, including the Northeast.

Slaying the Beast

As it stands now, 2020 is shaping up to be the real challenge year for Northeast production growth.

OPIS PointLogic and IHS Markit are expecting gas production growth of 5.7 Bcf/d in 2019. With Permian production growth challenged for most of the year, this allows the Northeast to continue to grow, though at a slightly lower rate than what has transpired in 2018. As producers round out 2018, the region is expected to achieve 4.0 Bcf/d of growth out of the total 8.8 Bcf/d in the L48. However, in 2019, the Northeast is expected to account for about 3.7 Bcf/d of growth.

Moving into 2020, overall L48 production is expected to grow a more modest 2.4 Bcf/d. However, with Permian becoming unleashed in late-2019 production from Texas and New Mexico is expected to grow 2.8 Bcf/d. Clearly, this creates a challenge for non-oil-associated gas producers, including the Haynesville, Marcellus and Utica. In fact, OPIS PointLogic expects the Northeast to post a very modest decline in production in 2020 as a result of this onslaught of associated gas growth.

The Permian is not the only associated gas play on the upward trajectory. Growth is expected in Oklahoma from the SCOOP/STACK and in the Bakken in North Dakota, but the Permian growth is by far the behemoth.

From a Northeast producer and infrastructure development perspective, this is, of course, not good news. As the reality of the Permian has come into focus, we at OPIS PointLogic have had to continuously scale back our outlook for Northeast production over the next couple of years.

OPIS PointLogic is tracking 2.3 Bcf/d of Appalachia takeaway projects with in-service dates in 2019 and an additional 4.0 Bcf/d slated to come online in 2020. Along with the 7.0 Bcf/d of projects which will have come into service in 2018, this would bring total Northeast takeaway capacity to around 38.0 Bcf/d by the end of 2020. This is in addition to over 9.0 Bcf/d of intra-Appalachia pipeline projects being built to help feed into these takeaway projects.

Given the growth in associated gas coming over the next two years from Texas, New Mexico, Oklahoma and North Dakota and the resulting challenge to Northeast production growth, it begs the question of whether all these proposed Northeast takeaway projects are necessary.

To date, an overwhelming theme for many of the Northeast pipeline takeaway projects and the producers who anchor these expansions has been to supply growing Southeast demand, mainly LNG exports, with Marcellus and Utica production. These are some of the very same markets being targeted by the buildout of Permian projects. Caught in the middle of this battle is the Haynesville, which is in an even worse spot economically than Northeast production and will be the first domino to fall in this associated gas vs. non-associated gas competition. But given the magnitude of the increase coming from associated gas growth, cutting back Haynesville production is simply not enough.


As this is an associated gas growth story, the largest variable (other than the ever-present weather variable) that could affect this forecast is oil prices. Lower oil prices would discourage Permian oil production and, thus, would result in less associated gas. We’ve seen oil price volatility recently and certainly seen the ups and downs over longer periods, so a sustained strong downward move in oil prices could certainly change the severity, if not the overall trajectory, of this forecast.

This is also a demand-constrained market story, with associated gas growth pushing back on non-associated gas in a market limited by overall demand. The largest growth sector of demand over the next two years is LNG exports, which make up 4.2 Bcf/d of the overall 7.9 Bcf/d of growth in total demand between 2018 and 2020. However, OPIS PointLogic expects LNG exports to be curtailed well below full export capacity in the summer of 2019 and to a large extent in the summer of 2020. This is a function of the U.S. as the high-cost marginal LNG supplier in a seasonal and oversupplied global LNG market. The market story being laid out for 2019, and especially 2020, is quite bearish for gas prices. It is certainly possible that we may see, with lower gas prices, an easement of the expected summer LNG export curtailment.

Finally, expanding on the weather comment above, as we work our way through this winter we may find that we have significantly more available storage capacity come April 1, 2019 than we expected going into this winter. That additional space provides a home, or at least a buffer, albeit temporarily, for growing gas production.

Stay tuned and stay up to date by following OPIS PointLogic’s Gas Week Northeast and Gas Week Texas/Southeast and Gas Week Midcontinent reports, where we track the projects, production, demand, storage, pricing, news and analysis of these dynamic regional market conditions. As associated gas production becomes more prevalent, we’ll have all eyes on watch to see if it emerges as a Beast Slayer, Beast Tamer, or something else entirely.