Many of these companies have to cut back. Cash flows are declining significantly amid the slump in prices. At current
prices, drilling for natural gas is uneconomic in most cases.
Nevertheless, because cash-operating costs are still much lower than current price levels (once a well is already
drilled and infrastructure already in place), we haven’t seen many instances of producers cutting back production
outright.
One notable exception was Chesapeake Energy, the No. 2 natural gas producer, which announced earlier this week
that it was shutting in 0.5 bcf/d of production immediately. The company said it could increase that figure to 1 bcf/d if
market conditions warranted it.
On net, Chesapeake produced 2.76 bcf/d of natural gas in the third quarter, though it is the gross operator of close to
6.3 bcf/d. In either case, these shut-ins are a significant chunk of the company’s production. Relative to the entire
North American natural gas market, however, these production cuts alone are not enough to alleviate the current
natural gas glut.
Moreover, in the bigger picture, enormous production growth rates of upward of 7 bcf/d (the year-over-year increase
in onshore output as discussed in the following pages) are the real culprit in the dismal performance of natural gas.
Granted, mild weather this winter has compounded the bearishness in the market. Arguably, the move below
$3/mmbtu is primarily due to the reduction in demand from the unseasonably warm temperatures.
In the medium term, operators hope that reduced drilling activity will lead to declining natural gas production as output
from existing wells decreases.
In the short term, prices will likely continue to fluctuate at extremely depressed levels below $3/mmbtu as natural gas
attempts to compete with coal to alleviate the inventory glut. If the glut persists and the market begins to worry about
the possibility of an overflow scenario next fall (much like was the case in 2009), prices could spike even lower, below
$2, to force producers to shut-in production.
http://www.firstenercastfinancial.com/pdfs/100951.pdf
