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Downside for Natural Gas

Recently several industry observers have expressed optimism for natural gas prices. Currently, prices are stable and there are potential upsides.  Demand for gas for power generation is strong and growing.  LNG exports, as well as gas sales to Mexico via pipelines, continue to grow.  An unseasonably hot summer could be an added bonus.  On the supply side, the number of drilling rigs targeted toward gas has not been large enough to offset falling production.  All these factors are bullish for gas.

However, a recent article in “Rigzone” points out that DUC’s and casinghead gas could undermine the optimism. DUC’s are drilled but uncompleted wells which compose the “fracklog” (only need to be fracked to come on production). These wells, especially gas wells, could quickly start producing in response to significant price increases.  Over the last nine months, the number of DUC’s in the Permian Basin alone has increased by 43%.

Casinghead gas, or gas that is produced as a by-product in oil wells, tends to vary with oil production. Many analysts have focused on the supply of gas from the gas prone Marcellus shale in Pennsylvania and West Virginia, as well as the Eagle Ford shale of South Texas.  Somewhat overlooked is the fact that the Permian Basin of West Texas and Southeast New Mexico, while the hottest oil play on the planet, also produces a significant amount of gas.

As drilling in the Permian Basin continues to surge, oil and gas production is expected to rise. Gas production from the play may total almost 8 billion cubic feet in April, a 15% increase from a year ago.  Some experts expect Permian gas production to increase by 25% over the next year.

While drilling in the prolific Marcellus has not kept pace with the Permian, there is a great deal of gas which is being kept off market by transportation restraints. This will change as current pipeline projects in the area are completed.

Brandon Bossman, with energy investment banking firm Tudor Pickering Holt & Co. observes, “It’s a real risk that a year from now that prices could be below $2. You have this unfortunate confluence of Permian production ramping right into the teeth of a lot of new takeaway capacity in the Northeast.”

To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/148832/Drilling

Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide.  Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.