When US natural gas prices are obstinately hovering around a relatively low $3.50/Mcf and yet you have a lot of acreage in major gas fields, what do you do? Logic would tell you to cut back. Yet production has been rising in two of the country's biggest gas fields.
In the gas shale plays of the Barnett in North Texas and the Haynesville in East Texas and Lousiana, production continues to climb even as rig counts have dropped.
Historically, an area's rig count and the rise or fall of its output showed a rough correlation. But in unconventional plays in the past several years, new drilling mechanics and technology to wrest larger volumes of hydrocarbons from wells have altered that equation, analysts say.
The chief culprit that raises gas production from these plays' wells, despite a falling rig count, appears to be the lag time between when the wells are drilled and when they are completed--i.e., readied for production. Companies do not always drill a well and then immediately complete it; rather, they increasingly drill wells in batches and later return to complete them.
As a result, operators may release a rig after drilling a well. But if the well is not completed, production may not begin for weeks or even months. Consequently, wells "drilled in the first quarter of this year may have only recently come on line," Dan Morrison an analyst at Global Hunter Securities, said. "There may be that much of a lag."
According to figures supplied by Pritchard Capital Partners, which are based on Smith International rig count figures and the investment bank's own estimates, 88 rigs were employed in the Barnett Shale at the beginning of October 2010. But at the start of June 2011, that number had slid to 69 rigs and then to 56 rigs in early October 2011.
Yet in that same 12-month period, gas production in the Barnett rose from 5.4 Bcf/d to 5.7 Bcf/d, according to figures supplied by Bentek Energy, a unit of Platts. That compares to 4.75 Bcf/d at the start of October 2009. And from early October 2010 to early October 2011, oil production along the Barnett's northern edge grew from 75,464 b/d to 88,902 b/d, Bentek said.
Further east in the Haynesville Shale, a peak of 181 rigs were working at the start of July 2010. At the same time a year later, that figure had fallen to 126 rigs. Last week, the count was 110 rigs--surprisingly high given gas prices that during that time have stubbornly hovered in the $3-$4/Mcf range.
In July 2010, Haynesville production was 4.65 Bcf/d, yet by early October 2011, volumes had jumped to 7.58 Bcf/d, Bentek estimates show. Haynesville gas is "dry," meaning largely liquids-free.
Wall Street experts say well economics motivate producers to keep drilling for gas even when prices have sifted into the mid-$3s/Mcf. Even at lower prices, analysts say operators still receive good rates of return from gas drilling in the Haynesville and Barnett, as well as other gas fields such as the Fayetteville Shale in Northwest Arkansas and the Marcellus Shale in Appalachia. The Marcellus especially is close to desirable Northeast US markets where premiums to the Gulf Coast Henry Hub price can be $0.50/Mcf or more, experts said.
But the lag in well completions isn't the full story on why output from gas plays continues to rise. Upstream companies that increasingly become expert at finding a play's "sweet spot" are another reason for increasing production, particularly in the Barnett Shale where activity persists a decade after the play became an industry hot spot, John Bookout, managing director of energy for big equity capital investor Kohlberg Kravis Roberts, said.
"The variability across the Barnett is so great," Bookout said. And in the Haynesville, "a lot of wells drilled early on were in non-core areas. Now you see the whole area's much better understood."
