The trajectory of North American gas supply is set to change radically as a result of the fall in oil prices that has occurred due to COVID-19 and the breakdown in production cooperation between OPEC and Russia.
Prior to the global pandemic, languishing North America gas demand and near-full storage was already pushing gas supply and prices to near-record lows in 2020.
The impact of low oil prices could result in a drop of 8-10 billion cubic feet per day (Bcf/d) in associated gas volumes by the end of 2021. Associated gas is regular natural gas that is produced together with oil out of the same well. Associated gas volumes comprise nearly one third of total U.S. gas production (31 Bcf/d out of more than 96 Bcf/d total U.S. production as of December 2019). As oil activity declines and production is curtailed in response to lower oil prices, the associated gas production from those oil wells will also fall.
This massive reduction in gas supply will help offset or even overtake the drop of gas export demand as a result of COVID-19. While the dramatic shifts in both supply and demand should help offset each other, they will not occur simultaneously or over the same time period.
“Roughly speaking, for every 500,000 bbl/d of oil production drop, we see associated gas volumes fall by about 1 Bcf/d. Considering the depth and duration of the global oil situation, we could see an 8 Bcf/d reduction in associated gas.” – Narmadha Navaneethan, director, North America upstream research, IHS Markit
- The Permian Basin, long viewed as the gem of U.S. unconventional oil production, currently produces 4.6 MMbbl/d, along with 12.9 Bcf/d of gas (About 1 Bcf/d of that is flared at the wellhead due to current infrastructure constraints). As low oil prices constrain activity in the West Texas basin, oil production will fall to nearly 3 MMbbl/d, with gas volumes falling below 10 Bcf/d.
- Combined, the Bakken and Eagle Ford are producing nearly 3 MMbbl/d of oil and 7.2 Bcf/d of gas. By December of 2021, production will fall to 1.8 MMbbl/d and 4.6 Bcf/d, as the Eagle Ford’s decline will further alleviate pipeline constraints from Texas wells to Gulf Coast markets.
- Further reductions in associated gas volumes will come from smaller plays including the Wattenberg, Powder River Basin, and various mid-continent plays. These smaller oil producing regions will combine to contract about 2.5 Bcf/d.
“These are unprecedented times in oil markets, and they will affect U.S. gas markets once the COVID-19 impact subsides. As demand returns, dry gas producers are going to have to step up and fill the supply gap left by reductions in associated gas volumes, and the commodity markets are going to have to make it profitable to drill new wells”– Reed Olmstead, director, North America upstream research, IHS Markit