It’s Here! The Big Gas Rollover Of 2009
Everybody in the industry has been waiting for U.S. natural gas production to decline just enough that prices will recover to at least $4 per Mcf, if not higher, and stay there.

Article By Leslie Haines
Published Aug 6, 2009


Everybody in the industry has been waiting for U.S. natural gas production to decline just enough that prices will recover to at least $4 per Mcf, if not higher, and stay there.

By some accounts, the “Big Gas Production Rollover” of 2009 began in March and is now starting to manifest for real. On the other hand, Southwestern Energy Co. reached 1 billion cubic feet a day out of its Fayetteville operation in July, and Petrohawk Energy Corp. is approaching a half-B in the Haynesville.

U.S. gas production was off by about 1 Bcf/d from February to May, notes Michael Hall, vice president and E&P analyst with Denver’s Stifel, Nicolaus & Co. Inc.

“Officially confirming a trend in our eyes, daily production turned over for the third month in May 2009 to 57.5 Bcf a day, declining 0.6 Bcf a day sequentially and about 1.0 Bcf a day, or 1.7%, from February 2009’s peak. Production declines are accelerating and we remain comfortable in our view that U.S. production is entrenched in a steep decline through 2009 and into 2010.”

Hall says total U.S. dry-gas production is higher than he anticipated “as productivity remains impressively high.” He joins the chorus of others who say the rig count is losing some of its meaning, as productivity per rig has vastly increased in the past two years because of the shales, where IPs routinely impress.

Hall thinks 2009 U.S. gas production will average about 56 Bcf a day, with strong year-over-year declines of about 5 Bcf/d by year-end. He also says he is “increasingly convinced that 2010 production will decline year-over-year; we now estimate a decline of about 7.5%, with a much lower exit rate.

“This analysis paints a more bullish long-term scenario than our prior assumptions. The near-term, however, likely deserves even more caution.”

Indeed, the signals are mixed. In its latest data, the Texas Railroad Commission reported that gas production rose in February 2009 over the prior-year number, getting to 564.5 Bcf versus 479.2 Bcf in February 2008. It rose again in May, to 560.3 Bcf. In March, operators completed 1,176 gas wells in the Lone Star state, versus about 800 the year before in March. In May, they did it again, completing 1,183 gas wells, more than in the prior May.

Meanwhile, although investors want to see higher gas prices, they also insist that their E&P favorites increase gas production every quarter. That shouldn’t be hard to do. In a report last summer, Simmons & Co. International researchers estimated that Devon Energy Corp. has 18 years of drilling inventory in the Barnett shale alone; Newfield Exploration Co., 22 years in the Woodford shale.

“Petrohawk is single-handedly demonstrating the significant productive impact of the core Haynesville shale. Q2 production of 483 MMcfe a day was well above guidance and the

full-year forecast has increased to 530 MMcfe a day, or a stunning rate of about 60% annual growth,” notes senior analyst Chris Pikul at Morgan Keegan & Co.

On its conference call, XTO Energy Inc. chairman Bob Simpson says he still looks for an economic recovery and decreasing gas supply this year, due to the slowdown in U.S. drilling—but the company provides guidance that its own gas production could grow 20% this year (10% from drilling and 10% from acquisitions).

In the second quarter, XTO’s production climbed 32% year/year, to 2.89 billion cubic feet equivalent.

Can we have our cake and eat it too?

XTO reports having four rigs working the Haynesville and its last two wells there IP’ed at 6.5 and 6.9 MMcf a day during the second quarter. It has one rig running in the Marcellus and a second expected soon, with 10 to 12 horizontals planned for 2009. In the Fayetteville, it has six rigs drilling; in the Barnett, 10; in the Woodford, three. In this play, its last four wells IP’ed between 3.7 and 6.1 MMcf a day.