Ask the Experts Part I: Capital Discipline, Gas Rigs, DUCs, and LNG Exports Support Energy Pricing
In our monthly webinar series, the Energy Market Intel Webinar, we offered our customers the opportunity to submit questions to learn more about economic factors and marketplace trends that may affect their future energy purchasing decisions.
Most recently, customers requested information on natural gas supply and demand, such as the status of gas rigs, dug but uncompleted wells, and liquefied natural gas exports, as well as the impact on pricing.
Constellation’s team of market experts addresses them here:
In the historical chart you showed, we saw that price spikes have sold off strongly in a short time frame; will this change now that supply and demand fundamentals are different?
In previous price spikes, such as Q1 2014 (the polar vortex), oil and gas exploration and production (E&P) companies had much greater credit lines and access to capital for which to increase production, which they did that year and we saw production respond.
There were also fewer exports. Liquefied natural gas (LNG) exports started in 2016 and are now currently 10-11 Bcf/day and 6 Bcf/day of exports to Mexico with ~4 Bcf/day still be imported from Canada, (primarily to Pacific NW and the Midwest). This essentially takes production from 91-92 Bcf/day down to 80 Bcf/day, which is where we were when we started 2018. With strong export demand, LNG with continue to support strong exports and pricing.
How drillers respond in 2022 drilling budgets could be a key indicator of how the rig count will change and this could indicate where production is headed.
In February 2019, we had over 19 gas rigs and as of Aug. 31, 2021, we have 12. If demand seems high and we’re worried about supply, when will we see additional rigs?
As the rig count chart showed, we have seen rig count for gas rigs decline from 125 at the end of 2019 to 69 gas rigs in August 2020 to 100 currently as of Sept. 17th. A lot of the recovery has been from private operators and smaller firms, while many of the publicly traded oil/gas companies have held rig counts flat this year as they had trimmed 2021 capital budgets. The question now will be how much new capital they put to work (if any) in 2022 or keep levels flat to 2021.
Are any of the rig reductions a result of the recent weather (Hurricane Ida)?
There was some impact from Hurricane Ida to the oil count, which declined for offshore Louisiana from 14 rigs for the week ending August 27th to zero rigs for week ending 9/3 and recovered to 4 rigs for the week ending Sept. 17th. The absence of 10 rigs remains an issue to fully restarting production.
The bigger issue remains onshore processing plants and infrastructure that were damaged by Hurricane Ida that has been holding up production from fully recovering. Many rigs are re-staffed but not able to fully restart production, although that appears to be finally alleviating itself. Learn more.
Can the administration stop LNG exports on a temporary basis?
Due to the long-term nature of these trains (20-40 years) and the capital required, many of the projects have long-term offtakers that have contracts with the projected developer/owner. Any stop to LNG exports could face legal challenges that the owner is in violation of their long-term contract. Take for example that TTF and JKM are both currently trading over $20/MMBtu in Europe and Asia respectively. If we halted LNG exports, that could drive pricing in those markets higher and the U.S. LNG facility could be liable for liquidated damages.
How many LNG ships do we have in operation?
There are 64 LNG transport vessels in the world currently with trade volume being about 5 billion cubic meters. The biggest problem going forward for balance of 2021 is shipping delays out of China/Asia if there are further COVID outbreaks and the bottleneck as the Panama Canal as ships have had to wait several days during different periods since March 2020 as the shipping logistics have been thrown into flux.
What is the status of the number of drilled but uncompleted wells in the U.S.?
DUC wells in the US Lower 48 states have declined from a peak of 8,876 in May 2020 and declining to 5,713 DUC wells as of August 2021. The Permian Basin has seen the biggest declines from 3,722 in July 2020 down to 2,119 by August. Drillers are likely limiting DUC completion to their most productive wells and limit cash spending.
Get access to more insights on the latest weather and market factors impacting your energy bill by attending our next Energy Market Intel Webinar.