Newsletter No. 12
Hello everyone!
I Hope you all are having a great start to the week.
As I reflected back on the big storylines from the oilpatch over the past few quarters, it became clear that there’s something unique afoot with Natural Gas.
As we’ve previously covered, NG prices cratered last Fall, and still, have yet to recover. Interestingly enough, and contrary to expectations of many people in the business, some operators continue to develop their NG assets…in big ways.
So what’s more perplexing…the dramatic drop and continued depressed state in NG prices, or operators doubling down on the development of their NG plays?
As we unpack this conundrum, let’s first revisit (and refresh a bit) the NG price situation.
Contrary to popular belief, a bunch of oil guys in Texas, don’t sit around in cowboy boots, drinking cognac, smoking cigars, then dictating what prices should be in the future. Whether Oil or Natural Gas (or any other commodity for that matter), prices are determined by supply and demand.
While we’ve recently speculated about some curious and unusual events driving even more curious supply data, futures speculation shows NG prices doubling late in 2023.
Why?
From a simple macro level, global demand growth is forecasted to catch global supply. Add to that an expectation of continued weakening of the US Dollar, and we’re on our way to higher prices.
But let’s dig a layer deeper with an aging but still relevant story…the Freeport LNG explosion. Last summer Freeport LNG’s export terminal in Freeport, Texas shut down due to an explosion that crippled their export infrastructure.
Note: LNG stands for Liquified Natural Gas. It’s cryo for NG which makes it easy to transport on ships rather than pipelines. Cheaper and easier.
The market reaction whipsawed NG prices back and forth as short-term traders leveraged speculation on the long-term impact. What ended up happening was a mid-range cratering of NG prices…bucking conventional wisdom.
Cue the brain buster.
While the event did in fact reduce mid-term supply of LNG (a subset of NG), which should drive prices up as demand persists, in this case, the constriction on supply effectively blocked access to the demand.
Approximately 70% of US exported LNG demand comes from Europe. And that demand disappeared in an instant, creating an equally instant NG supply backlog here in the US. We produce approximately 26% more NG in the US than we consume. But if we can’t liquify it, we can’t export it. That means supply stays stateside and prices look for a new floor.
Fortunately (or should we say “finally”), the Freeport LNG transfer station came back online in a limited capacity a few weeks ago. Freeport represents about 17% of the US LNG supply export. It’s not a single point of failure, but we definitely have experienced the impact on NG prices.
This all leads us to ponder why some operators continue to develop their NG plays despite these persistently depressed prices.
Should they keep developing?
Well, if there’s one thing we know about the Oil and Gas business (I guess other than the only constant is change), timing is everything when it comes to achieving a strong ROI.
Operators who can weather such a pricing storm, could be making a smart play here. And there are some who are busy doing just that by drilling monster wells in the Haynesville formation here in the East Texas Basin and in the Marcellus formation in the Appalachian Basin.
These wells often come in at 20-30 million cubic feet of gas per day (and produce the majority of their reserves in the first 24 months). The wells cost in excess of $20 million, but are still economic even at $2.20 / mcf price.
The breakeven point on such a well would occur in approximately 16 months. And if they time it right, when prices recover substantially, that breakeven timeline could be cut in half.
But for most operators, that’s a lot of capital to risk with such high volume requirements. Risk can be mitigated with higher prices, as long as supply chain prices don’t inflate at an unreasonable rate like they have in the past 12 months.
So, to answer the question, “should they keep developing?”
Those that can, should. But that is the exception, as the US is simply oversupplied. Until we get Freeport back to full capacity and add more facilities like it, demand for the amount of NG supply we develop will continue to be limited.
Make no mistake, the demand is out there globally. We just need to get out of our own way (regulatory interference) to make it happen.
Let’s close this week’s newsletter with a brief update on King…
1) We are currently drilling our third well in Borden County, Texas in the Believer’s Project.
2) After 20 years at the Campbell building in Dallas, we moved! Corporate HQ is now located at 15301 N DALLAS PARKWAY, SUITE 900, DALLAS, TX 75001.
With great appreciation we would like to thank and recognize several King team members for their help in making this happen:
Amy Rodriguez (I call her A-Rod), Lauren DesCamp, Miya Ward, Tracy Turner, and Eric Barslow to name a few. Thank you for working on your day jobs while also boxing things up for the whole team! YA’LL ARE AWESOME!!!
One final but important shoutout to CHARLES KAUFFMAN…
Last week, I mentioned Ovintiv with the huge purchase of oil/gas assets from EnCap. I mentioned the team was from Laredo. The team actually hails from Encana, not Laredo.
Thank you Charles!
The World of Oil & Gas Reporters and Analysts with Jeff Mower, Director, Americas Oil News
Don’t miss the latest episode of “The Jay Young Show,” featuring special guest Jeff Mower, as they dive deep into the fascinating world of the global oil market!
Recommended Reads
The US set a not-insignificant number of records in NG consumption last year (but we killed it in production too – not covered in the article below). So check it out to see the performance…it’s pretty cool.
US Natural Gas Consumption Set Multiple Records in 2022
To stay with our NG theme for today, below are links to both the US consumption and production data. I’m sure you techie folks can figure out a way to see them on the same chart. That’s not me. Enjoy anyway!
US NG Consumption Data from the EIA
US NG Production Data from the EIA
(Note: production data is classified by the EIA as “withdrawals”)
It’s been a minute, but I would be doing you a disservice if I didn’t share a good read from Scripture that has surprisingly been informative about mindset in business. Yeah, I went there. No, you don’t have to, but it’s a really good read. Check out James’ (Jesus’ brother) letter to the 12 tribes of Israel who found themselves dispersed all over Europe and Asia as a result of lots of cultural erosion (i.e. rejecting God), war, and enslavement. Many of them integrated into other cultures and became merchants and other types of entrepreneurs.
There are some outstanding results developing in the current program… KOPX Program 4. If you are not in it, and you are accredited, it’s a good time to have a conversation! You can schedule a Zoom here.
Lastly, if you have a subject you would like me to discuss, please do not hesitate to reply to this email. I will do my best to include it as soon as I can.
All the best,
Jay
