Drilling down or sideways?

Natural gas prices have come up sharply this spring. In part, reduced storage and cooler weather are blamed, while others point to "market bias", but certainly drilling activity has an impact, at least in the minds of the folks trading gas at NYMEX. The graphs below show the picture but close examination reveals slightly deeper insights.



First, overall drilling is is about where it was five years ago. What's changed is the focus. More people are looking for oil than natural gas because oil prices have stayed high. That makes perfect sense. However we note that natural gas production has also gone up, despite greatly decreased drilling rigs, at least in the US. In Canada gas production is down while oil production is up though drilling really hasn't changed much.

Huge deposits of shale gas have been tapped in recent years in the US  Midwest. The key is that, because of lateral drilling techniques, one drilling rig from one location can drill and tap huge areas of natural gas. An important second point is that shale gas wells produce a lot of gas quickly, and a third point is that production is only called that if it can be moved to market. 

In the US Midwest there are fewer drilling rigs producing more natural gas situated at a nexus of multiple easily accessible pipelines: fewer rigs equals increased production. This conclusion makes the Canadian result seem reasonable. We have  shale gas in Canada. The gas though, is located in more remote areas and is not served by multiple pipelines. It's far away and a bit stuck PLUS it has to compete with an explosion of natural gas being delivered right into the market in and from the US gas fields.  Canadian natural gas can't compete and so drilling and production are down.

Oil is another story. The US needs oil, all they can find and all we can ship them too. The price has stayed high and so drilling and production has increased both in the US and Canada. 

As a final comment, you'll hear "experts" tell you drilling is down and prices are headed up as a result. Both may be true but the relationship is not likely causal, no matter how much "common" sense they claim. Producers have to drill to replace reserves or their stock prices take a hit. There are small variations in the supply and demand balance but overall its is just that, a balance.