Giving gas away? (so to speak) - not a story I liked!

#1

Saw a headline “shale boom means they cannot give gas away in Texas” and did not look forward to reading it. Our Apache wells are only producing natural gas near Toyah. Not sure of the accuracy, but it seemed pretty well researched. Shale boom means they cannot give gas away in Texas

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#2

OMG let’s hope they can solve this. Not good news for sure.

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#3

You are correct, in the recent months the Waha hub has set records for the lowest price of natural gas, with it being priced in the -2.XX range.

This is driven by the oil economics being so strong on a basin wide level that they can produce the gas at a loss and the basin is still profitable. This becomes a much scarier proposition when your wells are only prolific in natural gas. Luckily, the price realized by operators becomes very dependent on their firm transportation portfolio to get the gas to better markets.

In your case, Apache has a substantial transportation portfolio, with more on the way. See slide 32 of this presentation (http://investor.apachecorp.com/static-files/260bd008-1d7d-4edb-b126-0b0c47bc6814) They are able to transport some of their gas away from the Permian to the gulf coast to much higher priced markets (2.60s for April and May).

How that transport value is allocated back to any specific well is determined by internal accounting practices within the company. Generally, these huge pricing differences do not last forever, as midstream companies become motivated to build more transport capacity to take advantage of the spread between where the gas goes into the pipe and where it is delivered to. Most are forecasting the permian to be dicey over the next 18 months, and then enough capacity will come online for the price differentials to be narrowed.

Another thing that can occur in the case of wells that are only producing natural gas is that they can be shut in to preserve the resources until higher prices can be realized, since they are not getting any value for other types of production. One question we have been trying to figure out the answer to in the office is: if a well produces natural gas into a negative market and has no positive revenue from other products, it creates a loss from production - can that loss be allocated back to the landowner through the lease?

It would be great to get someone with more legal expertise to weigh in on that question, as we have not seen any leases with clauses that control for that event.

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#4

Yes, I think it was Wall Street Journal mentioned companies donate free gas to the electric utility in Odessa. Driving across Delaware Basin and into New Mexico one sees many gas flares. If environmentalists realize so much gas is being burnt, there might be an environmental/political reaction. (sorry, not trying to be political)

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#5

@Roy in reference to your comment about vented gas, here’s a very interesting story in the weekend WSJ about combining otherwise vented natural gas with an onsite generator, thus producing electricity to drive a bitcoin mining operation.

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pinned globally #6
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#7

Problems continue in West Texas. Gas for today at Waha hub traded as low as minus $9! Forward months at Waha have rebounded slightly from their lows.

Current Waha forward prices: May $-.13 June $ .46 July $ .96 August $1.2 September $1.08 October $1.65
Even though these are low values operators that have not hedged are now - With negative prices the realization that zero is not the absolute downside risk.

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pinned globally #8
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