The Rise Of U.S. Associated Natural Gas

Associated natural gas is the gas that also comes along as a basically free byproduct when crude oil (petroleum) gets produced. Especially with oil prices rising this year (which obviously encourages more drilling), associated gas continues to be an integral part of the U.S. natural gas portfolio. We have three key associated gas fields: the shale plays of Bakken in North Dakota, Eagle Ford in south Texas, and the mighty Permian in west Texas, the last one constituting over half of our associated gas.

U.S. associated gas has become so important that some believe it has installed an inverse relationship for oil and natural gas prices, where higher oil prices lead to more oil drilling that leads to more associated gas production that leads to lower gas prices. Yet for now, it's indeed worth noting that despite the latest run-up in oil prices that has just pulled back a bit, natural gas prices have been at high levels not seen since early-February, with prompt month closing in the recently elusive $3.00.

Unfortunately, many Permian producers haven't been able to capitalize on the rise in crude prices because they hedged production at a lower rate of $50 or $55 a barrel. "Why Aren’t Permian Oil Producers Profitable?" EIA though has been consistent about WTI oil prices next year averaging in the high $50s, low $60s.

The Permian's pipeline constraints haven't really hampered production growth yet, but that could change over the next few months or into 2019 if new pipelines don't come online. Looking at some recent conference calls and investor presentations, it's clear that some producers are concerned, while other's aren't: "The Permian Oil And Natural Gas 'Growth Wall' Is Short-Sighted." Platts, for instance, still expects Permian oil production this year to increase 1.2 million b/d and "reach 3.9 million b/d by December."

The associated gas is a main reason why today's U.S. gas production complex is the most immense in its history. And the surge is just beginning: EIA has a 15-18 Bcf/d surplus (U.S. production minus U.S. consumption) emerging by 2025. This year alone, gas output will be up 7-8 Bcf/d, another Oklahoma worth of production added to the system.

The reality is that, despite some flaring issues that would be greatly helped by more pipelines (producers know that flared methane is wasted product), associated gas has neatly backfilled the fall of offshore gas. The federal Gulf of Mexico now yields just 3-4% of our total gas output, compared to 25% in 2000, and production has been consistently plummeting there. Offshore, however, could easily be put back in play with higher prices and the Trump administration goal to develop "The Offshore U.S. Oil And Natural Gas Treasure Trove." As for the Permian, like many of the southern-based plays, much of its future gas output is destined for our burgeoning LNG export complex being built along the Gulf Coast. "NextDecade asserts that the Permian may hold nearly 500 trillion cubic feet of natural gas at breakeven prices below zero dollars." We now have 350 Tcf of proven gas reserves total.