As we enter the second half of winter 2018-2019 and the country is anticipating cold snaps, many market participants are concerned about recent dips in natural gas production volumes across North America. Throughout January our team of natural gas analysts received client questions regarding the source of production cuts with some market participants questioning if structural changes are at play rather than seasonal impacts such as freeze-offs. Through our natural gas Production Forecast our analysts are able to determine that production cuts are due to operational issues, freeze-offs and temporary outages; production is indeed expected to rebound in the coming weeks.
Though Lower 48 production recently receded notably from the record high set in late November 2018, we don't believe the shift is representative of any structure shifts and expect a full restoration soon. As winter sets in, the recent declines are a function of freeze-offs, temporary outages and operational issues associated with cold weather. Though these operation interruptions are likely to cause January actuals to come in below forecast, we have no reason to think structure changes are at play, which is why we are maintaining our Production Forecast for February 2019 to average 88.3 Bcf/d. This forecast of course does not account for further unforeseen disruptions to system operations or freeze-offs. These situations do pose some risk as weather forecasts in recent days trended radically colder than last week's model runs. Current forecasts also show extreme cold skirting major production areas, apart from the cold shot forecasted to move into the Northeast toward the end of the week of January 21.
The Genscape Daily Production Estimate shows production set a record high of 88.3 Bcf/d on November 30, but declined steadily afterward, with two distinct dips: the first on December 12 at 84.7 Bcf/d and another January 3 at 84.5 Bcf/d. These production fluctuations may be overstated due to end-of-the month pipe balancing by schedulers, where production scrapes tend to ramp up before dropping off during the first few days of each month. Since production peaked in November, production averaged 86.0 Bcf/d - about 2.4 Bcf/d below the peak - while January's month-to-date average of 85.6 Bcf/d is coming in nearly 2.7 Bcf/d off the high.
Figure 1. This graph depicts Lower 48 Production volumes along with Henry Hub Spot pricing from November 2018 through January 2019
Production gradually rebounded since the dip in early January, but lower production levels may continue to decline in the Rockies, where freeze-offs, once encountered, tend to last throughout the winter. The Genscape Daily Production Estimate shows volumes return above the 86.0 Bcf/d mark on January 10, rising to as much as 86.4 Bcf/d January 11, closing the delta to the record high to about 1.8 Bcf/d. During the past seven days, production is averaging more than 1.7 Bcf/d above the recent low from January 3.
Amid the rebound of the last seven days, the largest production gains are in Texas (excluding Permian), up ~675 MMcf/d, the Permian, up ~660 MMcf/d, San Juan, up ~450 MMcf/d, and the Rockies, up ~370 MMcf/d. The recent gains in Texas and San Juan daily prints bring production in those regions back in line with our forecasts.
Figure 2. The graph above depicts the seven-day average change in production volumes
The rebounds in San Juan and Rockies are expected with the warmer weather of the past two weeks, as the primary culprit of their initial declines were freeze-offs and cold-weather associated operational issues on pipelines. The spate of operational flow orders (OFOs) and other operational alerts issued in recent weeks by area pipelines, including: Colorado Interstate, El Paso, Kern, Rockies Express, Transwestern and Wyoming Interstate, supports our claim that production dips are not due to structural changes.
The drops in the Texas regions are likely a function of higher demand on local systems, as many of the points showing lower receipts are interconnects with intrastate systems. During cold spells, we often see decreased receipts from the intrastate pipeline systems as gas is absorbed locally to meet higher local demand. In these areas, periods of demand increases can decrease our production sample when production volumes go directly to demand - serving intrastate pipelines, which do not post public data. Northeast production growth has also been suppressed by ongoing maintenance on the Rockies Express (REX) Pipeline, where receipts have dropped almost ~0.7 Bcf/d due to planned maintenance in Ohio.
Freeze-offs and system interruptions also knocked out more than 1 Bcf/d of Western Canadian production. A cold front moved into Alberta on January 4, pushing production as low as 11.6 Bcf/d, about ~970 MMcf/d below the 30-day average. From January 5 about ~4.9 Bcf/d of production was choked back, or an average of ~76 MMcf/d. While Alberta volumes are recovering, we believe recovery will be slow given temperatures in the north region of the province are forecast to remain extremely cold through the week of January 21.
Figure 3. This graph depicts the freeze-offs in Alberta, specifically showing how production declined in early January with low temperatures.
Meanwhile, in neighboring British Columbia, an unplanned outage of the Westcoast McMahon processing plant curtailed roughly 0.5 Bcf/d of Horn River and BC Montney production. They did not provide a restoration of service date. Production should come back from these events, barring additional unplanned disruptions and/or more freeze-offs with the incoming weather systems.
Genscape's Natural Gas Production Forecast report includes in-depth summaries and detailed assumptions for production by region in North America. The weekly forecasts combine forward gas and oil prices with rig counts and well economics, allowing prevailing market conditions and prices to inform our models. To stay on top of natural gas production this winter, click here.