The BOE Report recently ran an article originating from a major news service about natural gas storage levels entitled “ U.S. Gas Glut May have Grown 10 Times More than it Usually Does.” Anyone who reads energy news gets inured to dumb stories, but reading this one – particularly the headline – was like passing a kidney stone wrapped in barbwire.
It’s not as if the article simply had a poor forecast or some other subjective slant; there is plenty of room for opinions and even crazy ones often have some grounds for existence. This, however, was the equivalent of diagnostic car repair advice from someone who’s never gotten off a donkey before. And in these times where the energy industry is suffering because the general population doesn’t understand it, these articles are actually harmful because their source gives them credibility. On top of that, natural gas supplies are of significant importance, or should be, unless you enjoy frostbite.
The article showed a single-line graph that displayed current gas storage levels in North America. While it is true that the current level is a record, the lamentable headline and juvenile analysis might lead one to a completely wrong idea of where we are truly at, supply wise. In a nutshell, natural gas storage levels are at a record because there was almost no winter last year, and November was incredibly warm as well. Gas storage activity follows very familiar patterns – storage is depleted in winters, and rebuilt in between them, more or less. Here is what the actual storage situation looks like; probably the opposite of a glut when considering the non-existent winter last season and the warm start to November:
Two factors are important here. The first is that, as noted, weather-related demand was exceptionally low, which should have left record amounts in storage. The big news however, missed entirely in the article linked above (and flatly contradicted by the title) is that these record storage levels are incredibly shaky and a normal winter will create a frenzy in the other direction, with the possibility of a rapid depletion of storage and possibly dramatic price spikes.
Presently, we’re hardly above the 5-year average and only about two weeks of cold weather away from the 5-year minimum, for this time of year. The headline that the glut grew 10 times more than it normally does is embarrassingly senseless when viewed next to this chart, never mind the completely mystifying assertion that the glut normally grows. The data point used to generate the headline is a single week’s change in storage levels, compared only to last year. The data point is entirely weather driven, so as a reference point it’s as meaningless as taking the amount of snow that falls on a given day as 1/365th of the total for the year.
This isn’t to imply that we haven’t had a surplus of gas production in the past half decade. North America has seen natural gas production growth exceed demand growth, and that has compressed prices. The danger of these stories in the media though is that they perpetuate the idea that the glut is here to stay.
Here is how we got to the present gas supply situation. New technologies unlocked vast shale deposits that had previously been uneconomic:
Shale gas supplies increased from 10 bcf/d in 2008 to over 40 at the start of this year. That type of growth is very unsettling to the market and did lead to a glut.
But look a little closer at what led to the glut, and see if those factors are still at play. Here is how we got to a glut situation:
A large number of gas rigs were in action until the end of 2012, which caused the spike in gas production. Lazy energy analysts have observed that gas production has remained high through to the present despite the fall in gas drilling rigs seen above, and concluded that a less than a hundred rigs drilling for gas can now keep US production at over 70 bcf/d. But two very significant factors are not taken into account in these analyses.
First is the role of DUCs, or drilled but uncompleted wells. As horizontal drillers got more efficient – drilling longer laterals and drilling more wells from a single-pad location – drilling became easier and cheaper, but the wells were not always immediately completed or brought on stream. So the effect was that all the active rigs built a bank of uncompleted wells that have been gradually completed and brought on line, keeping the market well enough supplied. Fortunately the Energy Information Agency now publishes statistics on these well counts, and here is the latest DUC data:
A few things are important to note about DUCs – first, the inventory is gradually being drawn down, meaning that we can’t count on this backlog forever to maintain production. Secondly, the inventory that is being drawn down is in all likelihood not homogenous in terms of quality. It is highly probable that the best wells were brought on first, to do otherwise is pretty illogical. So the remaining backlog is likely of much lower quality and will have less and less of an impact.
The other factor that analysts fail to mention when expounding on rig counts, rig efficiencies and gluts is the impact of natural gas produced as a byproduct of oil production. This gas, called associated gas or solution gas, is often forgotten as a major contributor to the surplus. As per the EIA Drilling Productivity Report, three large shale basins that are major oil producers – the Bakken, Permian, and Eagle Ford – produced at the peak of their oil production about 16 bcf/d of natural gas. That is over 20 percent of total US natural gas production. That total is also impacted by the DUC inventory phenomenon, as in the chart above the DUC oil well inventory is falling now as well.
That’s a lot of hand chosen data, the overreliance on which should make anyone suspicious. Many crappy analyses are buried under a mountain of data that is cherry picked to support a foregone conclusion. These tables however are important, and not apparently understood or considered by the enthusisastic but ill-informed market commentators employed by mainstream news outlets. I suppose there are grounds to say well who cares, poor analysis is not unique to the energy business.
But we all should care about this, because real and perceived natural gas supplies are having a major impact on policy decisions with respect to climate initiatives, energy self-sufficiency, and trade patterns. It is a resource that we should not take for granted.
Read more insightful analysis from Terry Etam here