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Discussion: (20 comments)

  1. Jon Murphy

    Wow…a quick look at that chart suggests there is almost no correlation between the number of rigs drilling and Production.

    Hm…

    1. MacDaddyWatch

      Productivity enhancing technology stretches well beyond the very narrow concept of a rig count and well beyond directional drilling and fracking. Any conclusion based on a simple rig count is very myopic and explains very little.

      By example, counting heads in the labor force while ignoring productivity doesn’t do it. And some of the newer and very creative rig-related applications simply reduces the number of needed rigs to pump the same volume of crude by nearly eliminating or dramatically reducing the timely and expensive process of disassembly and reassembly as the rig is moved to a different location.

      And there are dozens of other macro considerations that relate to product pricing, pipeline capacity, refinery capacity and productivity and all the rules and regs that impact this critical variable. And some of this comes and then goes over time. Counting rigs and then coming to conclusions in a multi-dimensional environment won’t get you to first base–this is not 1980.

  2. Kum Dollison

    Watch out for “Moving Averages.” Production is Down from January. Not a lot, yet (a fracked gas well takes a bit longer than a fracked oil well to go into steep decline,) but when the decline hits it’s liable to be precipitous.

    An ex. being, The Barnett Shale (the first big fracked field) with 15,000 Wells has now been surpassed by the Haynesville with 1,500 Wells.

    1. Jon Murphy

      A moving average is designed to account for one-off trends like the one you are describing. It is impossible to extrapolate a data trend from one data point, so the MMA seeks to solve that problem and a long-term trend can emerge.

      1. Kum Dollison

        Yes, But every month since January has been Below January. The trend for Six Months has been slightly downward.

        I picture Wile E. Coyote flying off a cliff, and seeing a sign, saying, “The Moving Average Has Turned Down.”

        :)

        1. Jon Murphy

          Wait, what moving average are we talking about here?

          1. Kum Dollison

            The one above. The 12 mo. moving average for nat gas production. It continues to rise, but is destined to turn down in a couple of months.

          2. Jon Murphy

            I don’t know about that, Kum. I was looking at the monthly production levels (as reported by the FRB) and they typically fall between January and now. In fact, this year’s decline, while not as mild as last year’s, it still historically mild. Monthly year-over-year growth rates have been holding steady around 4% (give or take) this entire year. There isn’t anything in the data right now to suggest an imminent year-over-year decline in production.

    2. MacDaddyWatch

      Here’s a news flash regarding rig-count/production level charts that crossed in Q2, 1998. That was 14-years ago.

      Myopically focusing on the rig-count and then extrapolating in order to rationalize an alarmist case of declining future production level has been unambiguously WRONG for 14-years. 14-years!!!!

      Its more than just a Saturday night problem. Its a bigger problem when your are partying while posting.

  3. Jon Murphy

    Hm, yes, this is quite interesting. On a rate-of-change basis, it seems that the relationship between natural gas extraction and the number of natural gas rigs in operation has deteriorated since about 2000, with the most dramatic shift coming from 2009 onward. While rigs have been in a general declining trend, production is at record levels and rising.

    So, in other words, the relationship of rigs to production isn’t as strong as it once was. Falling or sealing rigs no longer indicates falling production will necessarily follow.

    1. Kum Dollison

      Similar to drinking Tequila. It seems like Saturday night will never end.

      But, it do.

      1. Its Gsatt

        ya, but there’s always next Saturday. party on

  4. Kum Dollison

    Jon, last year, July Marketed Production was Up over January by 71.19 Billion cu ft.

    In 2010, the number was +70.52 Billion Cu Ft.

    http://www.eia.gov/naturalgas/monthly/pdf/table_07.pdf

    1. Jon Murphy

      Indeed, you are right. But, historically, those years are anomalies. Of the 40 years of history I have, only 10 of those years had rise between January and July. Of those 10 years, last year was the strongest, followed by 2010. Since those years were abnormally high, combined with unnaturally low demand from the mild winter this year, it is not surprising to see this year’s production fall back into historical trends.

      But let’s not forget the big picture here: natural gas is still growing year over year. Production is up about 4.4% from the same month last year. Annual Production (the 12MMA) is up 7.1%. What we are seeing is slower growth, sure, but not a recession or slowdown by any means. All of the data trends are normal. It has been the last few years, not this one, that were unusual.

  5. Jon Murphy

    Let me show you what I mean.
    Here is a graph of the annual rates of change for Natural Gas Production (left axis) and US Natural Gas Rotary Rig Count (right axis). From 1990-2002 (circled in red), there is a very strong relationship between the rig count and production: the two moved very much in sync, and if the rig count fell below 0, so would production. From about 2005-present (circled in brown), that relationship has fallen apart. Rigs have spend much of the past 3 years below 0, but production has not dipped into negative territory. Additionally, the relationship of the turning points has weakened; they no longer occur at the same time.

    Looking at the new relationship, I feel comfortable enough to say that the rate of growth in Production is slowing, as suggested by the rig count. However, a declining rig count no longer suggests that a decline in Production will follow.

    1. Kum Dollison

      You better look at that chart, again, Jon. The Rig count “leads” production, but production Is headed down.

      The “lead time” might have changed a bit with the popularity of horizontal fracking, but the relationship hasn’t changed. There still “ain’t no free lunch.”

      1. MacDaddyWatch

        Based on the timing of the crossing lines of the ND rig-count/production charts, and with the “lead time” now over 14-years and still “leading,” don’t you think that it might be time to grab onto another more reliable tool from your toolbox.

        Do I really have to get into that old “broken clock” thing?

      2. Jon Murphy

        The relationship has changed Kum. When rigs go negative, production no longer follows suit. That’s a pretty big change. Furthermore, the major turning points, rigs are leading, but it misses several cycles over the past few years. That is a huge shift from what it was in the 90’s.

        My point here is that you can say that production will likely slow based on the decline in rigs. However, you cannot say Production is headed for a decline just because rigs are in a decline. That relationship no longer holds.

    2. The count of gas-directed rigs seems more tightly correlated with price than production?

      Natural Gas Prices and Drilling Rig Counts

  6. Jon Murphy

    Just so I am clear, I do think that the glut of natural gas on the market now, coupled with exceptionally low prices that will persist at least into 2013 will eventually conspire against production and we will start to see it decline. I am not entirely sure on the timing of this slowdown (probably mid-to-late 2013 as the rest of the economy heads towards a mild recession). However, this slowdown will be due to purely economic conditions, and not failing wells. I fully expect these wells to return to productivity as the general economy picks back up possibly sometime post mid-2014.

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