Natural gas glut

Shale gas strategy shifts with price:
Rush is over; Drillers now focus on best and lowest-cost plays

Claudia Cattaneo, Financial Post Published: Thursday, February 26, 2009

With natural gas prices collapsing and, according to one analyst, potentially plunging to zero this summer, the North American shale gas rush is slowing to a trickle.

After exploding in recent years thanks to new drilling technology, significant drilling plans in the highest-cost plays, such as the Barnett shale in Texas and the Horn River in British Columbia, have been put on hold.

'Activity is shifting away from where it was, to the best plays and the lowest-cost plays,' said Dallas-based Paul Sander, vice-president of the mid-continent business unit at EnCana Corp., North America's largest producer of unconventional gas.

'These are big massive resources and in a low-price environment the sweet spots will be the clear winners,' Mr. Sander said. 'I don't think industry is walking away from shales. We are just focusing on the best parts at this point in time.'

Chris Theal, managing director of research at Tristone Capital Inc., said companies are moving capital to lower-cost shale plays such as the Montney in British Columbia, the Haynesville in Louisiana and Texas and the Marcellus in New York and Pennsylvania, to make do with smaller budgets because of weak prices.

The emergence of gas from shales was seen as a panacea until a few months ago to replace maturing conventional supplies.

Most major companies shifted gears to chase unconventional gas, making acquisitions, buying up lands in places such as British Columbia, and taking cash away from their conventional operations.

According to Tristone, the top nine North American shale plays could contain at least 262 trillion cubic feet of gas, about equal to North America's proven natural gas reserves, but their cost of production can be half of what is required to extract conventional gas, or around $4.50 per million British thermal units.

As more industry operators piled into the business, production soared, pushing out higher-cost conventional supplies like those from Alberta, as well as liquefied natural gas imported from offshore.

The recession in the United States reduced natural gas demand, particularly from industrial consumers, to the point inventories are overflowing and production will have to be shut by September, Mr. Theal said.

He estimates about 700 million cubic feet a day will likely have to be taken off line, with Alberta seeing the bulk of the shut-ins.

The glut is so extensive Mr. Theal believes the gas downturn will outlast the oil slump, and gas prices can weaken substantially from today's depressed levels.

While the OPEC cartel appears to be doing a good job of managing the oil bulge, the natural gas market will be tougher to rebalance, he said.

'We are going to have a glut, and when that glut comes in the fall, gas prices are going to be below $3,' Mr. Theal said. Indeed, 'gas can go to zero,' as it did for brief periods in 2002.

Natural gas for March delivery fell US18¢, to settle at US$4.06 per million British thermal units yesterday on the New York Mercantile Exchange.

Gas has dropped 28% this year and is down 70% from the 2008 high of US$13.694 reached on July 2.

The downturn is depressing drilling in both Canada and the United States, a lot of which was driven by the shale-gas surge. Mr. Sander predicted drilling would continue to plunge.

Rigs active in the Barnett, the first and most developed of the plays, are down to 110, from 188 last fall, he said.

As for EnCana, it has reduced rigs deployed in the Barnett to two from five. At the same time, drilling is continuing to rise in the Haynesville, where EnCana is a top operator and 'there are enough positive indicators, especially with the high initial [production] rates, that people are still interested in progressing the play at this stage,' Mr. Sander said.

Drilling in Horn River is lower than what was anticipated last year, while activity in the Montney is flat, said Todd Garman, oilfield services analyst at Peters & Co.

'It's not a terribly positive outlook for the (oil) service sector,' he said."