Reduced rig activity and producer CAPEX is likely to keep dry-gas production subdued over the next few years. Gas-directed shale plays could expand, but material growth in total Lower 48 gas production relies on much higher crude oil prices.
We have run a few scenarios (see the chart below) that demonstrate how crude oil price may be the largest contributor to natural gas production growth. The production models are based on well economics alone, and for several combinations of possible oil and gas prices.
Using this method, there is an apparent production dip in mid-2021 that we believe is a overstated. As we criticize our model, we recognize operators don’t make drilling and completion decisions based on well economics alone. For example, hedge portfolios and DUC wells could support production.
Therefore, AEGIS expects dry gas production will see minimal growth from the current ~88 Bcf/d level, and not whipsaw higher as portrayed in the chart.
A flatter profile is more in line with what the EIA now expects. The government recently revised its gas production estimate higher and flatter for 2021. More about the EIA’s forecast can be read here.
Our “Oil High_Gas High” scenario (light blue line) unsurprisingly produced the highest gas output profile. The high oil case assumed a $5/Bbl increase across the curve when the prompt month was at $40/Bbl. A higher gas case assumed about a 30c increase across the curve. The most interesting scenario is the “Oil High_Gas at Curve” (gray line), as a $5/Bbl increase in crude oil and natural gas at the curve achieves almost the same gas production profile as our high-high case.
There are a few reasons for this. First, this model runs on historical well economics and as certain oil drilling locations move through their break-evens, more output is produced. A $5 move higher in oil kicks off more production in some oil-plays with break-evens in the low $40’s. The addition of more crude oil will inevitably lead to more associated gas where current production has been depressed due to low oil prices.
In this methodology, there is less sensitivity when we shock gas prices to the upside as pure-play gas locations like the Haynesville and Appalachia are mostly already in the money at the current gas curve. In other words, higher gas prices only marginally increases gas-play supply based on historical well economics.