Natural gas prices have been trending downward since August, with Henry Hub spot dropping from more than $9/MMbtu to around $2/Mmbtu. Enverus Intelligence® | Research’s most recent monthly Macro Forecaster report, available to EIR subscribers, predicts continued weakness, with Nymex gas averaging around $2.50 this summer and remaining in the $2.50-$3.00 range until winter 2024-2025. These price levels will inevitably drive a reduction of activity in gas-focused plays. However, some public companies operating in the Appalachian Basin see a silver lining, predicting that softening demand for oilfield services and materials will drive cost reductions in the back half of this year.
Range Resources COO Dennis Degner said on a Feb. 28 earnings call that he was already seeing service costs stabilize and anticipates opportunities for savings this year, following announcements from U.S. operators that they were slowing their drilling programs to maintenance level. “If you look at an example, where fuel prices are today versus maybe where they were in the back half of 2022, that could present an opportunity to shore up, let’s just say, some savings for the balance of the year, along with tubular goods starting to see some relief,” Degner said. “So, we would expect the deeper you get into the year, there would be some opportunities that would further present themselves for service cost reductions.”
EQT CFO David Khani said Feb. 16 that he, too, anticipates a decline in gas-directed drilling this year to drive opportunities for price relief in H2. CEO Toby Rice noted that EQT had locked in its rig and frac crews for most of the year, a move several larger Appalachian operators have made to mitigate service cost inflation. He said he’d seen some “signs of loosening there on price” for steel, which the company has procured through the end of H1, which could result in savings in H2.
Chesapeake Energy is already reducing activity levels, with one Haynesville rig dropped in Q1 and one each being taken out of the Haynesville and the Marcellus in Q3. It is also seeing a pullback by other Haynesville operators, especially private companies, Chesapeake COO Josh Viets said on a Feb. 22 earnings call. He expects operators to “start pulling back with the weakness in the gas pricing we see today.”
However, Viets noted that he’d not seen “much softening in service cost to date” because of the continued strength of the oil market. Without a softening in oil prices, he said, “We’re not baking any material cost inflation as we work into the back half of this year.” Even with lower activity, Chesapeake expects well costs per foot to rise 10% YOY in the Haynesville this year, but less than 5% in the Marcellus.
Coterra Energy operations SVP Blake Sirgo echoed Viets’ sentiments on a Feb. 23 earnings call, saying, “It’s hard to pin a service cost to a commodity price. I mean it’s really ultimately a function of activity and how much services are available on the market.” However, he noted that the company is seeing some price softening.
“I’m happy to say we’ve seen a little bit in rig rates here recently, and that’s a good sign,” Sirgo said. “We’ve seen a softening in casing — our OCTG going out three to six months — we’re starting to see some price coming down and that’s a good sign. But ultimately, it’s going to be a function of activity across the Lower 48. All rigs and crews have wheels, and they will travel, so we’ll see where activity goes.”
Strong oil prices could limit service cost savings for operators in gas plays. Click for more (available to Enverus Intelligence Publications subscribers)!
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