Oil producers may be tempted to boost capex in second-half 2018 to fully exploit high prices while the natural gas price outlook appears less promising until LNG facilities come online in 2021, Drillinginfo Inc. said in a report of its most recent five-year projections.

Analysts are bullish about short-term dynamics and expect commodity prices to remain at healthy levels but long-term demand will likely hinder production growth and prices.

The U.S. remains on track to pass Russia as the world’s leading producer of crude oil, Drillinginfo said, but that distinction will be delayed because of severe production declines in Venezuela and a blockade of Libya’s oil ports by a militia leader in the eastern half of the country. Replacing those lost barrels on the world market falls to Saudi Arabia and Russia.

“While this will likely delay the U.S. in reaching the top spot for crude oil production for a while, it will not stop the inevitable,” Drillinginfo said. “The robust economics and vast shale resources will make sure of it, especially with $65+/Bbl prices.”

The analysts expect U.S. dry gas production expansion to slow, but still experience average increases of 2 billion cubic feet per day (Bcf/d) over the next five years, leading to projected output surpassing 90 Bcf/d by year-end 2023.

Assuming a static price of $60/bbl for West Texas Intermediate (WTI) crude oil, analysts expect gas to continue to average $2.60 per million British thermal units (MMBtu) through 2020, then move up into the $2.65/MMBtu to $2.80/MMBtu range beginning in 2021. LNG export terminals that come online then will add demand and apply upward pressure to natural gas prices.

Drillinginfo identifies only seven areas with natural gas breakeven prices between $2.40/MMBtu and $2.91/MMBtu that would be able to alter the supply and demand balance. They are:

  • Eagle Ford-Hawkville Tier 1
  • Arkoma-Fayetteville Tier 1
  • Anadarko-Granite Wash Tier 1
  • Marcellus-PA-West Tier 2
  • Utica-Dry Gas Tier 2
  • Arkoma-Woodford Tier 1
  • Fort Worth-Barnett Dry Gas Tier 1

Marcellus PA West Tier 2 and Utica Dry Gas Tier 2 have the greatest potential for production growth. That is behind Drillinginfo’s $2.60/MMBtu forecast for 2019-2020.

“In reality,” the analysts wrote, “we are expecting a price between $2.65 and $2.80, as there are no areas that come into or out of the money within that range.”

The analysts see risk with propane if China follows through on its threat to apply tariffs to imports from the U.S. Shipments to China constitute 11% of expected U.S. propane exports in 2018.

“U.S. sellers would have to redirect their cargos to other countries and receive a discount to China’s orders, or pay more for transportation costs,” Drillinginfo said. “Because of the marginal cost to ship to other countries, there will be more propane sold domestically at a lower price with no demand there to meet it, which will drive prices lower.”

Joseph Markman can be reached at jmarkman@hartenergy.com or @JHMarkman.

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