Summary
With gas prices already low and pipelines full, the question now is how much further prices could fall if new LNG enters the supply scene. This LNG will have to be unloaded and, unlike oil, there is no place for storage of these volumes. So, as they hit the market, the question is what gas supplies will be pushed out of the market and may need to be shut it. And, at what price and what time frame will the situation change.
Analysis
The first indications that the US gas market was going to be oversupplied with 1900 rigs running came well before the drop in prices started. As the new pipelines from the Rockies came on-line, they were immediately filled and additional gas that had been expected to enter those pipelines had to be shut in or put into whatever excess pipeline capacity existed at any price. Once this happened, it was only a matter of time before the market capitulated when the economy started to decline last year. However, even with rig count dropping quickly (already about of 30% onshore US rigs have been shut down), there is a strong case to be made that there could be a multi-year slump in prices due to the twin factors of lowered demand along with excess domestic capacity exacerbated by new LNG supplies that cannot be stored. This situation is a further negative for onshore US unconventional gas producers such as Range Resources, Chesapeake, etc since their production is highly capital intensive and relies on high initial production rates at decent prices to make a profit. If these initial flows are produced at low prices, then the DDA on the capital will start to overwhelm the cash component of the business and earnings will soon drop off a cliff. Virtually all of the US unconventional gas plays are considered uneconomic at $4.00 gas when all components of the costs (including lease costs, royalty, drilling, stimulation, production, transportation, and overhead) are considered.
