Falling US Gas Prices And Weaker IRRs To Weigh On 2023 Output

As US natural gas producers begin firming up drilling and production plans for 2023, the recent selloff in benchmark Henry Hub futures prices could weigh on already modest ambitions for growth this year, according to S&P Global.

• The Henry Hub spot price has shed almost half of its value since December peaks, settling at just $3.77/MMBtu 4 Jan, from over $7.5/MMBtu 23 Dec.
• Producer internal rates of return (IRRs) fell sharply in December on weaker prices, affecting the bottom line for operators in major shale basins.
• After hitting multiyear highs in late 2022, producer IRRs pulled back in December, dipping to close to or below 50% in most basins.
• In December, the Marcellus Wet remained the premier drilling sub-basin, standing head and shoulders above other liquids- and crude-heavy plays with an estimated 76% rate of return – down from nearly 90% in November.
• From November to December, estimated returns in the shale gas plays pulled back anywhere from 10 to 20 percentage points.
• Following the continued selloff in gas prices since late December, returns have likely weakened further into 2023, potentially resetting the outlook for upstream budgeting but many analysts are still anticipating modest production growth in 2023.
• The Permian Basin and the Haynesville would lead US gas production growth in 2023, with output rising about 500 MMcf/d and about 400 MMcf/d, respectively.
• In the Permian Basin, where shortages in drilling equipment, rigs, and completion crews are perhaps most acute, weaker IRRs could be another significant drag on production this year. With price blowouts caused by midstream constraints also becoming increasingly common, steep basis discounts or even negative pricing at Waha this year could be another constraint on Permian gas production in 2023.