Low prices deflate natural gas rush

Houston Chronicle | Posted: Friday, February 3, 2012 12:09 pm

By Simone Sebastian

Houston Chronicle

A precipitous plunge in natural gas prices has turned the national shale gas rush into a retreat.

Oil and gas companies released a stream of announcements last week of plans to close off natural gas wells, pull out gas rigs and curtail spending in gas fields from Texas to Pennsylvania.

Oklahoma City-based Chesapeake Energy, the nation's second-largest natural gas producer after Exxon Mobil Corp., launched the barrage with an announcement on Monday that it would slash natural gas drilling in half over the next few months.



Conoco- Phillips followed, reporting that it would close off natural gas wells and dial down spending in gas fields.

Then on Thursday, Noble Energy and Consol Energy released plans to cut 41 wells from their joint venture's original 140-well shale gas drilling program in the Northeast.

"This situation has been a long time coming," said Robert Ineson, head of the North American gas research group for IHS CERA.

The price of natural gas has plummeted from more than $13.50 in 2008 to under $3 per million British thermal units. Developments in drilling techniques, including hydraulic fracturing and horizontal drilling, led to a resurgence in North American drilling, particularly in dense shale rock formations. That released a glut of natural gas onto the U.S. market, causing prices to drop.

Hopes that a frigid winter would help, as homeowners used natural gas for heat, didn't materialize. Instead, fall and winter temperatures have been warmer than usual for many Northern states, and natural gas prices have continued to fall.

"As it got below $4, you heard some grumbling," Ineson said. "But when it got below $3, you saw things change pretty quickly."

Shale rock cutbacks

Shale rock fields holding dry natural gas, or methane, are experiencing an exodus. Companies are chopping operations in the Barnett Shale in north Texas, the Marcellus Shale in the Northeast and the Haynesville Shale on the Louisiana-Texas border.

There are 780 natural gas drilling rigs operating in North America, down from 906 a year ago.

The U.S. Energy Information Administration noted that 2011 brought the largest increase in marketed natural gas volumes in history. Daily production grew by more than 7 percent over 2010. But year-over-year, growth will drop to 2 percent this year and to 1 percent in 2013, the federal agency projects.

"In the face of continued low spot and future prices, as well as record high storage levels for this time of year, drillers appear to have begun cutting back on new production plans for 2012," the agency wrote.

Huge amount stored

But so much dry natural gas is in storage that it will be awhile before slower growth in production has much effect on the market, Ineson said.

Prices rose last week in response to the tightened production - closing Friday at $2.68, compared with $2.34 a week earlier.

But the United States is saddled with 3 trillion cubic feet of natural gas, 21 percent more than it typically has in stock at this time of year, according to federal data.

"It's a huge, huge number," Ineson said. "And it's going to take awhile to absorb all that, even if companies dial back on production."

Energy producers won't completely curb natural gas production. Turning off a well's spigot can damage the rock below. And some land use contracts go void if companies don't drill or produce.

Plus, some natural gas wells produce high-value liquid fuels like butane, propane and ethane, making it worthwhile to keep them running.

ConocoPhillips executives said that's what's keeping them from pulling more rigs out of fields.

Of the 2.5 billion cubic feet of natural gas that ConocoPhillips produced in North America each day in the final months of 2011, two-thirds produced enough natural gas liquids to make them economic, Chief Financial Officer Jeff Sheets said.

"Off the top, there's a portion of our portfolio where it's just not going to make sense to shut in wells," Sheets said. But, he added, "We will have some shut-ins of natural gas going forward, on the order of 100 million cubic feet a day."

Chesapeake, one of the first companies to make a bet big on U.S. shale gas, plans to cut up to 16 percent of its daily natural gas production and curb drilling in areas including the Barnett Shale.

About 90 percent of the company's capital spending budget targeted dry natural gas in 2009. This year, it is just 15 percent.

The rest will funnel into fields containing high amounts of oil and natural gas liquids.

More to come

Other energy companies are likely to follow suit, said Alan Lammey, an energy analyst for WeatherBell Analytics.

"By spring, we will see prices really run down, and more producers will put the brakes on supply."

Because natural gas prices are closely tied to heating demand, the price tag slumps as temperatures moderate in March.

But the shale gas boom hasn't become a bust, Lammey emphasized.

"We could very well have a bar-the-door, hellacious winter next year," he said.