High gas prices further repair balance sheets, though producers remain reticent to grow volumes.

Capital discipline and low storage have created a nearly unprecedented scenario for high gas prices, but hedging mutes the windfall. Despite natural gas directed capex rising nearly 50% from $13 billion last year to $19 billion this year, gas demand growth will continue to outpace supply this year. Additionally, significant portions of that additional capex will be consumed by inflation—labor and rig rates chief among those factors—further reducing the impact of the increased spending. Storage levels have also been left low after a longer-than-normal cold season, creating additional anxiety about gas supply and pushing Henry Hub above $8/MMBtu in recent weeks. Gas-focused operators realized more than $10 billion in hedging losses during 2021 and have hedged more than half of 2022 production at prices from $2.50-3.50/MMBtu, so financial benefits from current Henry Hub prices will be muted.

Dry gas production will grow 4.4 Bcf/d this year, largely to refill storage, before tapering to 1 Bcf/d of growth in 2023, with prices responding accordingly. Haynesville will be the main source of new volumes, growing nearly 3 Bcf/d this year, while Appalachia will grow a smaller 0.6 Bcf/d. Associated gas will resume its role in delivering growth as oil production increases by 1 million b/d, bringing on an additional 2.5 Bcf/d this year (over 1.5 Bcf/d just from the Permian). Next year, price and associated gas force a decline of nearly 2 Bcf/d in Appalachia, as the Haynesville grows by 1 Bcf/d and the Permian grows by nearly 2 Bcf/d.

Gas producers will experience another challenging year in 2023, as a lack of demand growth and storage needs will challenge prices. Despite an expected Henry Hub average price of $5.70/MMBtu this year, the high price party may be short-lived. As gas production increases, the threat of insufficient gas volumes in storage will subside, with expectations of reaching 3.5 Tcf by summer 2023. As storage fills, prices will retreat to $4/MMBtu next year and below $3.50/MMBtu in 2024. Lower prices combined with growing associated gas will push Appalachian volumes lower in 2023. Note, however, that this premise requires production volume growth showing up over the next few months. Should growth not start soon, prices will remain elevated as storage remains at concerningly low levels.

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Posted 09 May 2022 by Imre Kugler, Director, Upstream Research, S&P Global Commodity Insights and

Narmadha Navaneethan, Associate Director, Upstream Solutions, S&P Global Commodity Insights and

Prescott Roach, Sr. Analyst, North American Plays & Basins, S&P Global Commodity Insights and

Reed Olmstead, Executive Director, Upstream Research, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.