RigData Insights

Oil/Gas Ratios Continue to Favor Crude

  • Friday, December 27, 2019
  • Posted By Greg Tsichlis


oil vs gas

Source: Enverus RADAR, December 19, 2019

Trey Cowan, Senior Analysts, Enverus Drillinginfo

 

Winter 2007/08 marked a strong period for natural gas prices, which averaged nearly $8 per mmBtu during the span. In fact, most of 2008 was a strong year for natural gas prices considering that Henry Hub front-month futures averaged $8.90 per mmBtu. But you have to also remember that this was a very strong year for oil prices, too; which averaged their highest levels ever domestically at $99.75 for WTI crude oil futures.

 

Dividing average oil prices by natural gas prices, for 2008, we see the ratio between prices then was 11x. Thus, while oil was trading at a premium to natural gas on a Btu equivalency basis (which is a ratio of 6:1) the disparity between energy potential and economic potential was not as great as it has been over the past decade.

 

Coincidentally, the financial crisis and what followed also marked an inflection point for drilling activity in the United States. Prior to the financial crisis of 2008 around 80% of the onshore drilling activities were permitted to sites where natural gas was the primary target.

 

Similarly, early adopters of hydraulically fracturing the lateral sections of their horizontal wells were ones where most operators producing natural gas and NGLs in the major plays like the Barnett Shale, Haynesville Shale, Marcellus/Utica, and Eagle Ford. These natural gas operators were victims of their own success as investors soon came to the conclusion that the production ramp up coming from hydraulically fractured shale gas wells was defying the old Hubbert curve and would soon transform the natural gas markets from fundamentally undersupplied to perpetually oversupplied circumstances.

 

This helps explain the shift we see occurring in our introductory graph. Between the years 2008 and 2014 oil prices continued to flourish while natural gas prices did not. Thus, the annual ratio between oil prices divided by natural gas prices grew at a parabolic rate. The implication of this value shift favoring oil production over natural gas production is at the root of why the mix of rigs drilling for one hydrocarbon versus the other shifted so dramatically, too. What essentially happened during this time frame was that the well economics at realized prices overwhelmingly began to favor crude production. Fast forward to the present and we remain in a favorable condition for oil well returns, in general, to provide better results than gas wells, domestically. Thus, do not expect the mix of rigs drilling for natural gas to suddenly begin improving relative to the number of rigs drilling for oil.

oil and gas prices


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eceive a free one month trial of Platts Land Rig Newsletter (4 issues). Each week you'll receive the latest analysis of unconventional activities and general trends in the upstream market. Operators are categorized by the major shale plays and unconventional formations where activity is occurring. Plus, you'll see the drilling contractors involved by play with details on utilization, footage and market share. (Available in pdf and Excel format.)

Call 800-371-0083 or email CustomerService.RigData@spglobal.com.

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      FREE TRIAL OFFER

 

Receive a free one month trial of Platts Land Rig Newsletter (4 issues). Each week you'll receive the latest analysis of unconventional activities and general trends in the upstream market. Operators are categorized by the major shale plays and unconventional formations where activity is occurring. Plus, you'll see the drilling contractors involved by play with details on utilization, footage and market share. (Available in pdf and Excel format.)

Call 800-371-0083 or email CustomerService.RigData@spglobal.com.

Mention code 7HHONRPT

 Dissecting the drop in the rigs over the past year a little further led us to the observation that a significant portion of the decline in the overall count was due to private companies entirely exiting the field. A year ago, there were 307 private companies drilling land wells in the US.  Today, there are only 218 private companies drilling wells. 

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