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Top U.S. Natural Gas Marketers Post 2Q2021 Declines, but Surging Prices Point to Advances Ahead - Natural Gas Intelligence

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Leading North American natural gas marketers reported lower overall sales volumes for the second quarter in a continuation of a trend of year/year declines in the wake of production cuts imposed in response to the coronavirus pandemic. Still, there were several bright spots that suggest momentum is building. 

The 25 gas marketers included in the latest NGI Top North American Natural Gas Marketers rankings reported combined sales transactions of 109.85 Bcf/d for 2Q2021, down 4% from 114.07 Bcf/d in 2Q2020. It marked the third consecutive year/year decline.

The collective drop was driven in large part by declines near the top. Perennial No. 1 BP plc dropped 19% year/year, while No. 4 Macquarie Energy fell 17% and No. 5 Shell Energy NA declined 13%.

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However, half of the top 10 marketers posted increases, and many analysts expect both rising production and higher sales volumes in the second half of 2021, given mounting demand and tight global supplies following a scorching summer and an ongoing recovery from the virus.

25% Gain For ConocoPhillips 

Three of the biggest gainers in 2Q2021 were in the top 10. No. 3 ConocoPhillips' volumes rose 25% from a year earlier. No. 8 EQT Corp. climbed 21%, while No. 9 CFEi, a marketing affiliate of Mexican state power company Comision Federal de Electricidad, gained 23%.

ConocoPhillips' increase marked the largest in terms of absolute volume - nearly 2 Bcf/d. Spokesperson Dennis Nuss attributed much of the gain to the company's acquisition of Concho Resources Inc. early this year. The deal made ConocoPhillips one of the biggest producers in the Permian Basin. Its Lower 48 production averaged 794,000 boe/d in the second quarter, more than double its 311,000 boe/d in the same period a year earlier. The latest figures included 435,000 boe/d from the Permian. 

Still, Nuss added, the company also secured "new gas marketing and energy management agreements with producers, end users, and power generators throughout the U.S." during the second quarter, a sign of positive progress.

Additionally, Houston-based ConocoPhillips on Monday agreed to pay $9.5 billion to buy Royal Dutch Shell plc's Permian portfolio, a deal that would give it another production boost of about 175,000 b/d. The Permian assets held by Shell are 50% weighted to oil, with a 25% weight to each natural gas and liquids.

Price Catalysts

Natural gas futures have soared to seven-year highs above $5.000/MMBtu in September, as traders fixate on lofty cash prices amid late summer heat, robust demand for U.S. exports of liquefied natural gas (LNG), and festering supply/demand imbalance concerns ahead of winter.

LNG demand is expected to hold strong through the winter because supplies are precariously light in Europe.

The U.S. market, meanwhile, could face challenges of its own. It is on pace for 3.5 Tcf natural gas in storage for the looming winter, Bespoke Weather Services estimated. That would leave the country far below the year earlier level of 3.9 Tcf. Supplies could run low, Bespoke said, if wintry conditions arrive early or if the peak demand season proves particularly cold.

"It is all fear in the market, owing to storage levels that are viewed as less than sufficient in the event of a cold winter, not just here in the U.S. but even more so over in Europe," Bespoke said after a rally last week that pushed the October New York Mercantile Exchange contract above $5.400. 

Analysts separately at Goldman Sachs and Morgan Stanley have cautioned that natural gas prices could reach $10.00 this winter in order to temper U.S. LNG demand and keep more supplies at home to fuel domestic heating needs.

PBF Energy Inc.'s Alan King, senior director, said this month at the LDC Gas Forums Midcontinent conference in Chicago that if domestic supplies do prove light this winter, the U.S. market could indeed curtail LNG exports to meet American power needs. LNG volumes have hovered above 10 Bcf/d most of this summer.

"As a country, it's a national priority," said King, who procures gas supply for PBF's six U.S. refineries. "The fact remains that there's 10 Bcf in their hip pocket that to me, in an emergency, we keep locally. It's a nice thing to have, and there are not any countries that have that."

Still, he added, "I think folks will be able to react and we will not run out of storage."

Production Revival

Federal researchers expect more producers to step up output to ensure adequate supplies and capitalize on the lofty prices. With greater production, marketers would have more gas to sell, likely pushing up volumes before winter.

The Energy Information Administration's (EIA) latest monthly Drilling Productivity Report predicted that gas output would increase in October from September in six of the seven major onshore basins. Overall, EIA expects production to increase by 219 MMcf/d next month. That would follow modest increases over the summer months.

EIA estimated in its latest Short-Term Energy Outlook earlier this month that U.S. dry natural gas production would average 92.7 Bcf/d for the second half of this year, versus 91.7 Bcf/d for the first six months of 2021. The agency projected output would continue rising to 95.4 Bcf/d in 2022 as stronger crude oil and natural gas prices incentivize enough drilling to maintain growth.

"Demand is definitely back in full force," Samco Capital Markets' Jacob Thompson told NGI. The managing director of the Austin, TX, firm said, "Energy will always fluctuate, but there's no doubt oil and gas needs are increasing."

Thompson noted that producers held output mostly in check through the first half of the year, taking conservative stances amid the uncertainty of the pandemic. Still, with prices holding strong in elevated territory, "producers are almost sure to respond," he said.

That noted, threats linger. The Delta variant of the coronavirus sent infection rates higher in recent weeks, raising concerns about new economic restrictions - and energy demand interruptions — if the pandemic sustains a turn for the worse. An already wild hurricane season also reminded that more hits to production could follow storms.

Hurricane Ida, which crashed into Louisiana on Aug. 29, knocked out a majority of gas production in the Gulf of Mexico in the first half of September. Hurricane Nicholas followed last week and caused additional incremental output challenges.

Any enduring production challenges this fall would amplify storage worries. "Things could get dicey…heading into this winter," said Criterion Research analyst James Bevan.

Editor's note:  The NGI rankings are compiled using data reported in quarterly regulatory filings or directly to NGI. Companies providing data directly to NGI include Antero Resources Corp., ARM Energy Management, BP plc, Castleton Commodities Merchant Trading, CFEI, CIMA ENERGY LP, ConocoPhillips, Direct Energy, EDF Trading NA, Hartree Partners, Goldman Sachs' J. Aron & Co., Macquarie Energy, NJR Energy Services, Shell Energy, Symmetry Energy Solutions LLC and Tenaska.

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