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Despite decline in rigs, natural gas production forecast to increase
The total U.S. rig count as of March 6 was 1192, 600 lower than year-ago levels, according to data from Baker Hughes. Nearly 87% of the decline was from rigs designated as targeting oil, and more than half of this year-over-year decline occurred in Texas, where rig levels over last year fell by 326. The decline in Texas was driven by rig count declines of 173 and 73 in the Permian and Eagle Ford basins, respectively. The remainder of the overall decline, 13%, came from lower natural gas rig levels. As of March 6, only 26% (268) of total rigs were designated as targeting natural gas, a decrease of 77 rigs compared with last year's natural gas rig levels.
Despite declining rig counts, EIA forecasts continued growth in natural gas production over the next two years. In the past, the number of gas-oriented drilling rigs in a particular region was a common metric for estimating the production of natural gas. However, over the last several years, natural gas production has steadily increased, while the number of active rigs characterized as targeting natural gas has fallen dramatically.
There are several reasons that have contributed to the breakdown of traditional methods that seek to estimate natural gas production based principally on rig counts. To start, with the development of shale resources, there is an increased integration of oil and gas production, and natural gas is often produced from rigs that are targeting oil. Additionally, there have been increases in drilling efficiency, or the number of wells drilled per rig each month.
There is also a backlog of wells that have been drilled but not yet completed, which acts as a cushion for well additions, offsetting the more immediate decreases in drilling and permitting activity. As of the end of January, at most major plays in the United States, the backlog ranged from three to seven months. However, when drilling activity remains at reduced levels long enough to outlast the cushioning effect of the well-completion backlog, the number of new wells brought online will begin to decrease, which can eventually reduce production rates. Additionally, production may decline should producers defer completions.
In December 2014, dry natural gas production hit a record high of 74.3 billion cubic feet per day (Bcf/d), according to EIA's Natural Gas Monthly. This production increase occurred despite declining prices and falling rig counts. For 2014 as a whole, natural gas production increased 6.1%, which was the strongest growth since 2011, despite a 13% decrease in average natural gas rig count levels in 2014 compared with 2013. In the first two month of 2015, preliminary natural gas production data indicate temporary declines, largely attributable to freeze-offs during a few cold weeks in January and February. However, based on increases in rig efficiency and recent data, EIA's March Short-Term Energy Outlook forecasts that 2015 natural gas production will average 73.9 Bcf/d, an increase of 5% over 2014 levels. EIA forecasts that for 2016, production will average 75.4 Bcf/d, a 2% year-over-year growth.