As US Gas Exports Rise, Drilling Production Falling Off. Something is Going to Give.

March 9, 2023

US gas exports ramping up.

Production falling off.
This is not sustainable.

Financial Times (paywall):

Torbjörn Törnqvist, chief executive of Gunvor, one of the world’s biggest commodity traders, said the loss of European markets was forcing Russia to shut in gasfields, as there was no easy way to redirect supplies to Asia. As a result, shipments from America would become the “balancing factor”.

“The world will not be able to live without US LNG,” he told delegates. As more liquefaction capacity comes online, the US is set to become the world’s biggest exporter this year. And volumes are set to soar — dwarfing other players by the time the decade is out. US gas producers are jostling to take advantage. Chesapeake Energy yesterday announced a preliminary agreement with Gunvor to supply it with 2mn tonnes of LNG annually for 15 years, beginning in 2027.

It is an early-days agreement — and it’s unclear at this point where Chesapeake will be doing its liquefying — but it underlines the rush to fill the gap Russia has left in global markets. And drillers want to make money out of it — being paid international prices. Rather than selling at basement-level domestic Henry Hub prices, Chesapeake’s deal will be linked to the Asian JKM benchmark, currently more than four times higher.

Chesapeake boss Nick Dell’Osso told ES that upstream players wanted to gain exposure to global pricing. “As LNG grows in the second half of this decade to something that represents greater than 20 per cent of the US market — probably closer to 25 per cent — we believe we should have exposure to the end markets that are going to ultimately drive the economics in the US business.”

Other upstream players have penned similar deals. EOG and Apache have agreements with Cheniere that give them exposure to international prices. Devon Energy struck a deal in September to give it access to liquefaction capacity.

“I think it is a direction that the industry will probably continue to head,” Dell’Osso said.

Wall Street Journal:

At a major industry conference here this week, executives cited the stagnation in shale, saying it signaled a return to more dependence on foreign energy sources and more challenging times ahead for major U.S. companies, after most of them posted record earnings last year.

“The world is going back to a world that we had in the ’70s and the ’80s,” said ConocoPhillips Chief Executive Ryan Lance, during a panel at the conference called CERAWeek by S&P Global. He warned that OPEC would soon supply more of the world’s oil.

Oil production from the best 10% of wells drilled in the Delaware portion of the Permian was 15% lower last year, on average, than top 2017 wells, according to data from analytics firm FLOW Partners LLC. Meanwhile, the average well put out 6% less oil than the prior year, according to an analysis of data from analytics firm Novi Labs.

The atrophy of once-booming sweet spots has big implications for the global oil market, which years ago could count on rapidly growing U.S. oil production to blunt the effects of supply disruptions and rising demand. Without successful exploration or technological advances, the industry’s inventory constraints are expected eventually to push companies to tap lower quality wells that would require higher oil prices to attract investment, industry executives say.

Oil production in the U.S. rose from about 7.2 million barrels a day a decade ago to a high of about 13 million barrels a day before the pandemic. But domestic output last year grew at one-third of the annual average pace seen in shale’s heyday from 2017 to 2019, and hasn’t yet caught up with prepandemic levels.

The slowdown was mostly because of investor pressure on companies to curtail spending and limit growth in favor of generating higher returns. At the same time, weaker well results in the Delaware basin contributed to flattening output.

U.S. output grew about half as fast as many forecasters initially expected last year, and is projected to increase by about the same amount this year, according to the Energy Information Administration.

The recent degradation in well performance has stoked executives and investors’ concerns about the industry’s runway for growth, and has led companies to consider mergers this year.

Companies such as Chevron Corp.,CVX -0.63%decrease; red down pointing triangle Devon Energy Corp. and others that have held the Permian up as a central pillar of their future plans saw top wells yield less crude last year than the previous year.

Chevron, one of the largest landholders in the Permian, drilled some of the region’s most prolific wells in Culberson County, Texas, but some of its newer wells there have seen productivity decline.

The wells Chevron brought online in Culberson County last year are ultimately expected to produce 42% less oil, on average, than wells that began producing in 2018, according to FLOW’s estimates. The top 10% of wells Chevron brought online across the Delaware last year were about 25% less productive on average than its wells the year before, according to Novi Labs data.

Chevron executives said last week the company missed its oil-production target in the Delaware, citing higher-than-expected depletion rates. The company plans to revise its approach in the Permian, they said, shifting some drilling into New Mexico, and targeting areas that are likely more productive—moves that will reduce its pace of activity somewhat.

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4 Responses to “As US Gas Exports Rise, Drilling Production Falling Off. Something is Going to Give.”

  1. Anthony O'Brien Says:

    Profit first, freezing Americans is a secondary consideration. Ah silly me – freezing Americans is no consideration at all.

  2. jimbills Says:

    Saw this as well today:

    U.S. won’t reach a new record in oil production ‘ever again,’ says Pioneer Natural Resources CEO
    https://www.cnbc.com/2023/03/09/us-wont-reach-new-record-oil-production-ever-again-pioneer-ceo.html

  3. gmrmt Says:

    Export stuff toward higher prices and you import those higher prices in return.

  4. Ron Benenati Says:

    As a democrat I have to say, Mr. Biden, what’s up?
    We are the leader in export of natural gas. More drilling permits on public lands during Biden admin so far than in during the entire Trump administration, and Trump was considered really on that. Yes, then there is the Willow project.
    No problems here.


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