OOGEEP First Quarter Shale Production Analysis  

June 25, 2020

Ohio shale natural gas production slowed in the first quarter reflecting broader commodity market downturn and pandemic-related demand pullback. Uptick in permitting activity and improving commodity price market indicates second-half growth opportunities.

Quarterly Results

 

Production & Permitting

 

Ohio natural gas and oil operators produced 581.6 bcf of natural gas and 5.9 million barrels of oil from shale formations in the first quarter of the year, Ohio Department of Natural Resources data details. Led by Belmont Co., which accounts for nearly half of the production total, 97 percent of horizontal shale wells (2,509) reported natural gas and oil production during the quarter.

Belmont, Jefferson, Monroe, Harrison, and Carroll Counties, respectively, led the state in natural gas production, accounting for 532.9 bcf or 92 percent of the natural gas produced in the state. Guernsey, Harrison, Carroll, Belmont, and Monroe Counties accounted for 98 percent of oil production, or 5.8 million barrels.

 

Ascent Resources produced one-third, 190 bcf, of the quarter’s total natural gas output, primarily from Belmont and Jefferson Counties. Gulfport Energy produced 92 bcf mostly from its Belmont and Monroe Co. acreage, while Encino Energy accounted for nearly 80 bcf through its production in Harrison, Carroll and Jefferson Cos. Ascent Resources also led in oil production, with Encino Energy and Montage Resources completing the top three with 1.9 million and 1.2 million barrels produced.

 

The softness in initial 2020 natural gas production comes off a year in which Ohio produced record natural gas and oil volumes, but saw quarterly production slow in the back half, increasing just half percent Q3-Q4 as the Henry Hub spot natural gas price weakened. The national benchmark finished the year nearly 29 percent lower than the start ($3.11 vs. $2.22) and averaged 18.5 percent lower than 2018. That trend has continued through 2020 Q1, with Henry Hub prices averaging $1.84 through the first five months of 2020.

 

While production and drilling activity is a function of many factors, the commodity price environment is a key driver of activity. Reflecting the broader market commodity price decline coupled with COIVD-19 related economic shutdowns, operators have taken action to adjust 2020 capital expenditures and production guidance downward. Fewer horizontal rigs were running the first quarter of 2020 compared to the prior year, averaging 11 through March of this year and 16 the previous, according to Baker Hughes tracking.

 

Permitting, an indicator of future drilling activity, was down in the first quarter, with 59 permits issued compared to 105 from first-quarter 2019. Like rig counts, the pullback in permitting reflects the broader commodity market headwinds and pandemic-caused demand reduction. Weekly data through June 19, however, indicates an uptick in permitting, with 55 issued for the second quarter that ends June 30, compared to 67 the year prior.

The stronger second quarter permitting comes amid improving crude and natural gas liquids commodity prices and increasing consumer demand as various sectors of the economy reopen from pandemic-related shutdowns. As in 2019, Ascent Resources (47), Encino Energy (39), and Gulfport Energy (13) have been issued the most permits to-date.

 

Industry Trends

 

Nationally and globally, the U.S. remains the world’s top natural gas producer, accounting for 89.1 bcf/d, according to U.S. Energy Department data. Appalachia, consisting of Ohio, Pennsylvania, and West Virginia, accounts 36 percent of U.S. production and is the world’s third-largest natural gas producer, behind the U.S. and Russia.

 

Based on 2019 production, Ohio ranks 6th in the nation for natural gas production, one spot ahead of West Virginia, and 12th in the world, according to U.S. DoE data.

 

These continued strong production trends are against a backdrop of pre-pandemic rising U.S. and global natural gas demand. According to BP’s 2020 Statistical Review of World Energy, U.S. and global natural gas demand increased 3.3 percent and 2 percent, respectively, in 2019, with the share of natural gas in the global energy mix rising to a record high of 24.2 percent.

 

While it’s too early to predict the impact of pandemic shutdowns on global energy demand, the fact remains that natural gas continues to grow in domestic and global market share, particularly in electricity generation and industrial use.