US gas drillers shift from NGLs to lowest-cost wells as spread narrows

By CHRISTINE BUURMA and MARIO PARKER
Bloomberg

Natural gas drillers who flocked to liquids-rich basins in search of better profits just can’t seem to catch a break.

Seven years ago, as US shale output surged and gas futures tumbled more than 60%, producers abandoned reservoirs that only yielded gas and moved rigs to wells that also contained ethane, propane and other so-called natural gas liquids, or NGLs.

These NGL prices were tied to oil futures, which climbed in 2009 as the economy recovered. It was a strategy that worked well -- for a while.

Those days are over. Oil has plunged 56% from a year ago, and propane at the Mont Belvieu hub in Texas has tumbled 64%. The spread between NGL prices and natural gas shrank 9.2% last week to $7.02/bbl, the lowest in at least two years, squeezing producers’ profits.

The culprit is a repeat offender: shale production. This time, the boom in oil output from reservoirs like the Bakken in North Dakota has created a glut of NGLs, and the market is poised to remain well supplied. To survive, gas producers will have to focus on the lowest-cost wells.

“Drillers are going to have to retreat to where the sweet spots are,” said Bob Yawger, director of the futures division at Mizuho Securities in New York. “At these price levels, the rig count isn’t going to move higher.”

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