By The Daily Sentinel
Friday, August 28, 2009

Natural gas prices last week tumbled to their lowest level in seven years. U.S. supplies of gas are at an all-time high. And the number of drill rigs operating in the Piceance Basin of western Colorado is a quarter of what it was a year ago.

But, if you travel the backroads of the gas fields, the number of operating drill rigs and the amount of gas field traffic may surprise you. Major energy companies in recent weeks have announced new acquisitions to expand their gas holdings in this region. And, if you talk to industry people, you find an attitude that, if not wildly optimistic, is far from grim.

What gives?

“Current prices for natural gas are a disappointment, but not a surprise,” said Carter Mathies, chairman of Arista Midstream Services, which tracks industry trends. “Most industry people expect a dip in prices in the shoulder months between the cooling and heating seasons.”

More important for the future, he said, is the fact that prices on contracts for gas to be delivered in 2010 and 2011 are more than twice the price of gas being delivered today. Others in the industry offered similar information.

There are several reasons for this.

First, while it’s true that recent discoveries have substantially increased the available supply of natural gas in this country, not all of it is easily or immediately recoverable, Mathies said.

Additionally, while many new wells are producing, “The initial decline rate of a typical shale gas well is in excess of 35 percent,” he said. That means, in a year or two, the amount of gas produced from these wells will have fallen off dramatically.

Also, because so many rigs have stopped drilling, here and around the country, there won’t be as much new gas to replace that from the wells whose production is now declining.

Then there is the fact that manufacturing, a major consumer of natural gas, is picking up somewhat. And because of low prices, more electric utilities are turning to gas instead of coal.

There are other encouraging signs. Because of diminished deliveries, pipeline capacity isn’t as overwhelmed as it was and there is time to get new pipelines operational.

And, while Colorado’s new drilling regulations have undoubtedly added to the cost of working in this state, drilling and development costs overall are down as much as 35 percent from a year ago because equipment and personnel are more readily available.

No one expects a return to the frenzied drilling pace of 2007 and early 2008. Even future prices that are more than double the current level are only a little over $5 per thousand cubic feet. That’s a long way from the peak of almost $14 per thousand early last year.

Drilling could start increasing regionally by next spring.

“Lots of plans are being dusted off for gas development in this region,” Mathies said. “The earliest indications are coming from the larger companies with solid balance sheets and more acreage that affords them a more diverse inventory,” he added.

We hope he’s right. The natural gas industry isn’t the only economic driver in this area. But it is an important one that provides high-paying jobs, adds to retail sales and affects other sectors. A healthy and steady gas industry would be a great help as this region struggles to recover from the recession.