Category Scenario Planning

LPG Storage tanks

Associated gas & NGLS – much ado about nothing much for winter?

We’ve just completed an analysis we do a deep dive into a balance of 2020 forecast for gas and NGL supply in key oil producing regions that reflects the steep cuts occurring in response to current crude oil market conditions.  Our analysis indicates that even if the 30-40% May oil production cuts that have already been reported in North Dakota and the Permian Basin aren’t as high in June and July, the potential impact on NGL supply in key markets from pre pandemic levels will be significant, particularly for propane.   This is due to the high NGL content in gas coming from so called “associated gas” wells that primarily produce crude oil.

By contrast, the supply impact on “dry” gas coming into the market from these wells will likely not have the major impact on gas markets that some forecasters are hoping for.   This is because oil wells produce less gas per barrel than wells that produce mostly gas and gas condensate, and because demand for exported LNG has slowed significantly.   There’s also time to increase winter gas supply via incremental drilling in the “dry” gas plays if needed to boost winter storage.   But this gas doesn’t contain enough NGL to offset the loss of associated gas, which has implications for exports and winter heating markets.      This forecast uses a base case for oil production that tapers supply in Q2 to a level about 25% lower than December 2019, recovering in fall and winter 2020 to an exit rate for 2020 of 16% lower than 2019.    For reference, the estimated decline rate for shale oil production is between 50-60% in the first year without replacement drilling. For information on getting an excerpt of the study, please see our https://ngladvisor.com/markets/ page.

Strategy – learning from the “preppers”

Although the production and price forecasts in our January presentation to the Gulf Coast Gas Measurement Society may look unreal in April, the year isn’t over yet.  There a lot of similarities to the Covid-19 situation here.

By then we were seeing warning signs in both the E&P industry and the world of public health of a “disturbance in the force” of business as usual.   Southeast Asia used lessons learned from past pandemics to prepare to handle the next one, and several of those countries were able to minimize the damage to their economies and their citizens.

The US shale industry cut costs and improved productivity after its own version of the business flu when oil prices crashed in 2015-2016.   But once prices stabilized, attention returned to the wellbore.  Boosting cash flow and minimizing logistics costs weren’t top of mind.

Clients and our own business experience have taught us that scenario planning needs to include situations we’d rather not deal with, or run numbers for.  A “that will never happen” dismissal of a case undercuts risk management and puts us at a disadvantage to other players who know if they can think it up, it could happen even if the odds may be low.

Business “prepping” for possible downside scenarios is an investment – in developing options that can set us up for opportunities we couldn’t have imagined last year.

During these scary times when markets rise and fall almost daily, we know having cash on hand can buy both opportunity and peace of mind for our families.   For a business, prepping with cash reserves, hedges, and strong commercial relationships can create optionality and even be a company maker at times like these.

If you’re prepping your business to be able to pivot to a world that’s looking for execution excellence and sustainable cash flow more than ever, contact us.  Let’s create commercial and operating strategies to survive and thrive in challenging times.