Natural gas producer Chesapeake Energy, though wading through a prolonged downcycle of low commodity prices, sees upside on the horizon.

Growing domestic gas demand to fuel U.S. LNG exports and artificial intelligence (AI) data center consumption are two factors driving Chesapeake’s bullish outlook, Executive Vice President and COO Josh Viets said during the 2024 Unconventional Resources Technology Conference (URTeC) in Houston.

Oklahoma City-based Chesapeake’s view is that the U.S. natural gas market “will be extremely constructive” heading into 2025 and beyond.

“In fact, if we look out over the next five years, there’s an expectation that we’ll see an incremental 20 Bcf/d,” Viets said, “which is a 20% increase to natural gas demand compared to where we sit today.”

Getting to that point, however, might be a bumpy ride for gassy shale plays across the Lower 48.

The natural gas resource is there, but getting it out of the ground profitably could present challenges for operators.

That’s because breakeven prices for most of the major U.S. gas shale plays sit above the current strip price forecasts.

“That’s why most analysts are forecasting somewhere between $3.50/Mcf and $4/Mcf gas in order to support the demand that’s being built out,” Viets said.

When gas prices traded well below $2/Mcf this spring, most natural gas-focused producers were almost guaranteed to be in the red, he said.

Dry gas producers in Appalachia and the Haynesville Shale have begun responding to the sticky low prices by curtailing production and deferring completions.

Several major gas producers reported declining activity in their first-quarter results, including Chesapeake, EQT Corp.Range ResourcesCNX ResourcesGulfport Energy and other producers.


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Inventory story

Lower breakeven costs help produce more profitably under weak commodity prices—and Chesapeake is already one of the nation’s lowest-cost gas producers.

But the company’s $7.4 billion merger with fellow gas producer Southwestern Energy aims to lower the breakeven profile even further for the combined company.

The proposed deal would unite two of the largest producers in Appalachia and the Haynesville, with a combined portfolio of over 5,000 locations and 15 years of inventory. The U.S. Federal Trade Commission, taking an active role in scrutinizing new energy deals, is reviewing Chesapeake and Southwestern’s proposed merger.

One of the deal’s important aspects is the $400 million in annual synergies the companies will realize by coming together—which helps lower drilling breakeven costs and withstand commodity price volatility, Viets said.

The merger also gives Chesapeake a stronger foothold in two of the Lower 48’s premier gas basins, where operators are jockeying for low-cost drilling inventory.

But Viets said there’s still attractive inventory yet to be explored and delineated in U.S. shale gas basins. Gas basins have probably been underexplored due to a lack of infrastructure and a lack of capital in the space, he said.

“When I say underexplored, it’s really stepping out,” Viets said, “and extending the extensions of these resource plays.”

The market has seen a bit of this recently with the exploratory development of the Western Haynesville extension north of Houston—or “the Waynesville,” Viets said—by Comstock Resources and Aethon Energy.

But developing the extensional fringes of the play, like the Waynesville, also poses risks, he said. The Western Haynesville is deeper, has higher pressures and temperatures and is more expensive to drill.


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The Permian problem

Some of the blame for the sticky low natural gas prices can be placed at the feet of the prolific and market-glutting Permian Basin.  

The oil field of West Texas and New Mexico is expected to drive the bulk of U.S. production growth into the foreseeable future.

Producers in the core of the Permian Basin are there to produce crude oil, by and large. But as the basin matures, Permian wells are becoming gassier and gassier over time.

Associated gas volumes are so prodigious in the Permian that they’re hitting record levels, straining midstream processing and takeaway infrastructure. Spot prices at the West Texas Waha trading hub have frequently dipped into negative territory.

Viets spent the bulk of his career working in the Permian Basin: He was previously vice president of ConocoPhillips’ Delaware Basin business segment before joining Chesapeake in 2022.

“You essentially have free gas, with breakevens at or below $0,” he said.

The Waha woes and negative gas prices don’t faze Permian producers, though. There’s almost no response to production based on natural gas pricing.

That was one of the things Viets learned when ConocoPhillips acquired Permian player Concho Resources through a $9.7 billion stock acquisition in 2021. When calculating well economics, Concho essentially ascribed zero value to any natural gas production in the Permian.

“That’s really the mindset of the Permian producers,” he said.

Dry gas producers should expect associated gas volumes from the Permian to continue to grow into the future.

“The Permian will continue to be a dominant force within the U.S. natural gas industry,” Viets said. “And as new pipes get bid out in the Permian, I guarantee you that those pipes will get filled almost immediately.


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