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April 29, 2020

Appalachian Basin production growth disrupted by economic slow-down and stay-at-home orders

By GlobalData Energy

Natural gas prices have struggled in early 2020 hitting record lows due to US dry gas production being at record high and the Covid-19 pandemic, which has affected major shale plays such as the Appalachian Basin.

Although the reduction in associated gas from crude oil production across major oil basins has provided support to the natural gas market, it does not eliminate the fact that the market remains oversupplied. Operators in Appalachian Basin are still forced to readjust their capital expenditure (capex) although at a smaller percentage compared to oil producing companies.

By assessing the readjustment of capex of 15 companies, which account for approximately 85% of total production from Marcellus and Utica Shales, GlobalData estimates a reduction of 1.45 billion cubic feet of natural gas per day (bcfd) in output from this group of companies as compared to the forecast for 2020 before the sector crisis happened including coronavirus and crude oil price fall.

Per GlobalData analysis, the rig count drops by six rigs, from 41 rigs reported as of end of March 2020 to 35 rigs by the end of 2020. Overall, this rig reduction is a result of capital expenditure cuts summing up to approximately $1.5bn reported by operators.

GlobalData took gas wells drilled between 2018 to date as the most representative sample set to determine the economic viability of future wells to be developed in Marcellus and Utica. In a sample set consisting of slightly more than 2,800 wells, less than 25% of the wells have breakeven below $2.05 per thousand cubic feet (mcf).

The current economic slowdown is affecting the natural gas consumption over the next few months with the largest demand declines expected from commercial and industrial sector. Reduction in demand will be offset marginally by residential power usage with upcoming summer weather. Natural gas industry will not recover in the near term through 2020, with dry gas production expected to remain at approximately similar level as 2019, accompanied by high level of working natural gas inventory and reduced demand.

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