Natural Gas Podcast Questions

[bearcatbob]

Dan's post re his schedule indicates a Sunday podcast on the NG market looking good.

I would like to ask a couple of questions for consideration for inclusion in the podcast.

1. We hear constantly that drilling costs have hugely decreased and that we are therefore in a new economic environment as to what price is necessary to supply the market. It seems to me that much of the savings is in decreased pricing from the service industry who I suspect is selling services basically at cost to maintain crews. I know long ago and far away when I worked for an EC that was the response to market turn downs. Therefore, if demand for services increases will not the cost of services increase and at least some of the current cost environment disappear?

2. The site American Oilman (thanks for that one Dan) shows January 2019 NG pricing less than January 2018 ($3.195 vs $3.336). By January of 2018 all of the distortions from the "shale boom" should be out of the market and pricing should reflect a decent ROI for new production.

It seems to me that this is nuts. January of 2017 is $3.334 and the rig count is horrible. So, somehow a lower future price environment is going to bring forth the supply that the current market pricing cannot. Somebody help me with what I am missing?

Bob

[bearcatbob]

Dan, Please also discuss the differential from the sticker price at say Dominion South Point (Appalachian Basin price point).

Thanks,

Bob

[dan_s]

Dan's post re his schedule indicates a Sunday podcast on the NG market looking good.

I would like to ask a couple of questions for consideration for inclusion in the podcast.

1. We hear constantly that drilling costs have hugely decreased and that we are therefore in a new economic environment as to what price is necessary to supply the market. It seems to me that much of the savings is in decreased pricing from the service industry who I suspect is selling services basically at cost to maintain crews. I know long ago and far away when I worked for an EC that was the response to market turn downs. Therefore, if demand for services increases will not the cost of services increase and at least some of the current cost environment disappear?

Yes, as demand for services increases, so will the price. IMO about half of the completed well cost savings will stick. Keep in mind that there will be a lag of about six months between rising demand and increasing service costs.

2. The site American Oilman (thanks for that one Dan) shows January 2019 NG pricing less than January 2018 ($3.195 vs $3.336). By January of 2018 all of the distortions from the "shale boom" should be out of the market and pricing should reflect a decent ROI for new production.

It seems to me that this is nuts. January of 2017 is $3.334 and the rig count is horrible. So, somehow a lower future price environment is going to bring forth the supply that the current market pricing cannot. Somebody help me with what I am missing?

Pricing of the NYMEX futures contracts way out there is often hard to predict and does not mean that much. Don't read too much into it. Just remember that the U.S. natural gas market is expanding rapidly (from 80 Bcfpd in 2015 to 100 Bcfpd in 2020). It is a totally different market than the crude oil market.

[dan_s]

The U.S. market is actually several regional markets. Yes, the Appalachian Basin market is currently oversupplied so there is a discount on that gas. There is more takeaway capacity on the way, which will bring in more in-line with other regions.

This is also why I love the RRC / MRD merger. It gives RRC access to much better regional markets.