Coronavirus in Oklahoma: State natural gas producers benefitting from market changes, local and federal analysts say
Natural gas consumption may be headed lower, but prices aren’t.
The main culprit is the demand shock caused by the COVID-19 pandemic, according to an Oklahoma analyst who follows those trends.
“There is no doubt — consumption is down,” explained Tony Say, president of Oklahoma City-based Clearwater Enterprises. “But you need to look at the supply side.
“In November, our producers were producing roughly 94 billion cubic feet (Bcf) of natural gas per day, and now we are down to about 87.”
Over a gradual period of time, that will impact the amount of natural gas that flows into the nation’s storage system, he observed.
The trends were laid out this week by the U.S. Energy Information Administration (EIA).
The report states the agency expects that natural gas consumption in the United States in 2020 will trend lower because of expected declines in the amounts of natural gas used in the industrial, commercial and residential sectors.
As for the fuel’s use in the electric power sector, the agency also forecasts a decline for 2020, although it doesn’t expect that will occur until the second half of this year.
At its peak, wells targeting that specific commodity or oil wells that produce associated gas were sending about 97 Bcf per day of the commodity into the nation’s pipelines and storage system. Some of that flowed to consumers, while the remainder was taken by companies that export LNG overseas or buyers who put the product into storage.
Average daily demand from industrial, commercial and residential consumers averaged 21.4 Bcf in 2019.
In 2020, the EIA expects that demand will average 19.9 Bcf, a decline of 3.4 Bcf and the first time it has dipped lower than 20 Bcf since the summer of 2016.
It expects natural gas used for industrial purposes will lead that trend, accounting for 1.6 Bcf of that decline, and it attributes that to expected reduced economic activities caused by coronavirus lockdowns and milder-than-normal temperatures in the first quarter of 2020 that reduced demand for space heating in buildings.
As for natural gas used in the residential and commercial sectors, EIA expects average daily natural gas consumption in those to decrease by 3.7% and 6.9%, respectively.
Warmer weather in the first quarter of 2020 was the largest contributor to falling residential and commercial demand, the agency stated.
But declining demand doesn’t appear to be an issue for producers, at least for now.
The EIA expects the Henry Hub spot price to increase from $1.88 per million British thermal units (MMBtu) this month to $2.94 in December.
Behind the trends
So, what’s causing natural gas’ value to increase?
Say explained that fundamental supply and demand economics are the main driver behind that trend.
He noted this week that U.S. natural gas production has dropped about 7 Bcf per day since the energy demand shock started, mainly because of decisions made by operators to shut in producing oil wells (which also produce associated natural gas) as they wait for prices for that commodity to recover.
Those decisions, plus pledged production cuts by members of the Organization of Petroleum Exporting Countries and Russia, have brought some relief to oil’s value, with a barrel trading on the New York Mercantile Exchange Friday morning at $33.66 a barrel.
The cuts were made in response to a nearly immediate drop in global oil demands of about 30 million barrels per day because of the global economic shutdown government leaders were forced to implement as part of their response to the COVID-19 pandemic.
The question now, Say noted, is how quickly the global economy will recover.
He observed that most analysts expect global oil demand won’t recover to prepandemic levels for years.
And even before the pandemic’s demand shock impact was fully known, EIA was projecting that oil’s demand growth would slow to just under 1 million barrels of oil a day annually between 2022 and 2025.
Say explained lowered demand is likely to keep oil prices below where they were at the start of the pandemic for years, sidelining drilling programs most mid-sized independent producers pursue when prices are good.
“At $35 a barrel for oil, nobody is going to be drilling,” Say stated. “The capital required for any future drilling is basically gone. That’s a reality.
“Nobody is going to dump money into drilling new wells at that price, and when you aren’t drilling new wells and replenishing the natural decline of production from current wells, daily production volumes will continue to drop through 2020 and into 2021.”
To make matters worse, Say noted that many analysts believe that most mid-sized independents eventually will file for bankruptcy, further disrupting future development of drilling programs.
Say said he expects daily production could dip as low as 85 Bcf.
“That is when you will need higher prices to attract more gas.”
Even if oil gets back to $50 a barrel, he worries that producers could once again oversupply the market, sending prices for that commodity into a tailspin yet another time.
He said most analysts believe at least a portion of the current production decline in natural gas, probably about 3 Bcf per day, will once again be flowing into the nation’s gas processing, shipping and storage system by July.
But by then, power generators will be consuming significantly more gas than they are now to generate electricity as summer gets into full swing for the year.
Say, like the EIA, doesn’t see a massive increase in the cost for natural gas over the next 18 months, however.
He said expectations are that there will be enough natural gas in storage during the upcoming winter withdrawal season to get the nation through until next spring.
“We currently have a storage overhang because we were so warm this past winter, and what storage is left is rapidly filling because market players are buying as much as they can right now while prices are still low.”
Natural gas producers across Oklahoma will benefit as market prices increase for the fuel, Say predicts.
But other regional factors also are playing a role, particularly for Anadarko Basin producers who had been seeing prices over the past decade for their production significantly lower than what their eastern-Oklahoma counterparts were getting.
Earlier this year, Cheniere Energy activated its Midship Pipeline, a $1 billion, 200-mile-long pipeline that starts in Kingfisher County and heads south and east to southeastern Bryan County on the Oklahoma/Texas line, where it hooks into the nation's interstate pipeline system.
Cheniere, a major exporter of LNG, built the line to provide relief to western Oklahoma production that had been stranded by a lack of available shipping capacity, particularly once operators had begun fully developing drilling programs in the basin’s SCOOP and STACK fields.
The line has the capacity to carry 1.44 million dekatherms (about 1.44 billion cubic feet) of natural gas per day out of the basin.
Say noted it wasn’t uncommon last year to see western Oklahoma gas discounted 40 to 50 cents per MMBtu, compared to what producers in the eastern part of the state were getting.
But he said Midship’s activation, combined with well shut-ins, virtually eliminated that price difference overnight.
“There were days this month where (western) Oklahoma natural gas was trading higher,” Say observed.
“There has been a fundamental change” in the marketplace, he said.