Natural gas price seen as too low to sustain production

Posted Tuesday, Oct. 05, 2010
By Jack Z. Smith

jzsmith@star-telegram.com


FORT WORTH -- For U.S. energy producers, high-priced $11 natural gas is "kind of like a Saturday night drunk," Devon Energy Executive Chairman
Larry Nichols said at the opening session of the Unconventional Gas
International Conference and Exhibition on Tuesday afternoon.

"It may feel good at the time," he said, but it isn't a sustainable high.

Just as an $11 price is too high to persist, today's current market prices of about $3.75 are too low for the industry to thrive and maintain
strong natural gas production in the long term, said Nichols, who
stepped down this year from his longtime position as CEO of Oklahoma
City-based Devon, the leading producer in North Texas' gas-rich Barnett
Shale.

Even in the face of low gas prices, domestic energy producers have continued to do substantial drilling, particularly in major unconventional gas plays such as the Barnett, the Eagle Ford Shale
in South and Central Texas, the Haynesville Shale in Louisiana and East
Texas, and the Marcellus Shale in the Appalachian region.

By continuing to drill despite weak prices, "we've been ignoring the free market," Nichols said. But today's depressed prices represent "the free
market ... sending us a very powerful signal" that there is an
oversupply of gas, he said.

In futures trading Tuesday on the New York Mercantile Exchange, gas closed at $3.74 per million British thermal units, up 1.6 cents, in contracts for November delivery. Prices
had soared above $13.50 in mid-2008 before making a dramatic crash.

Drilling activity has been sustained by companies needing to drill wells to retain leases, by hedging contracts that have enabled energy companies
to receive prices for their gas that are well above market levels, by
joint-venture agreements mandating certain levels of drilling and by
Wall Street's willingness to pump money into the industry, Nichols said.

But drilling in a low-price environment inevitably will decline after energy companies have either drilled wells to hold leases or allowed
them to lapse, as the beneficial hedging contracts expire and as Wall
Street grows "weary of funding undisciplined growth" through companies'
excessive drilling, Nichols said at the three-day event running through
Thursday at the Fort Worth Convention Center.

Energy analysts generally are expecting continued modest gas prices through much of 2011, with some gains possible.

Nichols said stable prices in a range of $5 to $7 "would probably work in most [gas-producing] basins" in terms of sustaining healthy drilling levels.

Jeff Ventura, president and chief operating officer of Fort Worth-based Range Resources, a leading Marcellus Shale gas producer, agreed that "a
lot of gas could be developed" with prices in the $5-$7 range.



Read more: http://www.star-telegram.com/2010/10/05/2523048/natural-gas-price-s...

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Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on October 6, 2010 at 3:53
As energy companies focus on building leaseholds in shale oil and rich liquid gas plays, their ability to sustain acquisitions in dry shale gas plays decreases. The major Haynesville players still have a lot of undrilled leases to triage. Some will be allowed to lapse, some may be offered extensions and some will get drilled. Step-out drilling to continue defining the economic bounds of the shale will slow. We may be in for a slow year or two before everyone knows whether they are in the Play or not. We will just have to be patient.
Permalink Reply by Jack Blake on October 6, 2010 at 5:17
Jack Blake said there are wells in every section around him and in his section. Whether for lease hold or production they would not want the lease hold if Jack Blake were not in a prime location. BOOM SHACKA LACKA HOWLED JACK BLAKE
Permalink Reply by MARG on October 6, 2010 at 5:42
Well, we shall see how much our heating bills go down this winter!!!!?????? Or more appropriately how much HIGHER they get!!!!!!!!!!!!!!
Permalink Reply by Skip Peel - Mineral Consultant on October 6, 2010 at 5:52
Turn up the heat, MARG. We need all the price support we can get. LOL!
Permalink Reply by JWC on October 6, 2010 at 6:23
One positive comment about Natural Gas from Obama might do the trick.
Permalink Reply by Skip Peel - Mineral Consultant on October 6, 2010 at 7:57
JWC, IMO it's Congress, not the President, that will have the say on national energy policy. And I'm not expecting anything out of the next congressional session. Too many special interests in control on both sides of the aisle. And too much partisan rancor. We may have to wait for the global economy to rebound before any significant up tick in price occurs through natural market demand.
Permalink Reply by bryan on October 6, 2010 at 9:43
Thing is, Obama is an absolute fool when it comes to energy matters.

One wind mill is better than 10 natural gas wells in his view.
Permalink Reply by essay on October 6, 2010 at 9:51
they say the cure for low prices is low prices. it won't happen overnight but the domestic transportation market for NG will continue to grow regardless of what those idiots in washington do or don't do, and it's looking more and more like we'll be seeing an international natural gas market at some point when the U.S. starts exporting LNG.

chief among many other factors, sustained crude prices much higher than what they are now will virtually guarantee both happening concurrently.
Permalink Reply by MARG on October 10, 2010 at 6:33
We need to have an organized endeavor as operators and owners and work with industry, politicians, etc. for uses, grants for fuel stations (they give everyone else something -- don't believe in that, BUT we should count too) . We could work with NARO and other energy organizations, etc. to seek input and perhaps a large number would cause someone , somehwere to notice. The administration now seems to relate to unions, etc. In my career, it was felt that power comes in numbers. We were uccessful in everything except salaries. LOL NARO has lobbists, etc. We need to have local organizations that net work with others, etc. It would be a diffuclt thing to manage, but I feel certain that there are some shalers who could make a difference.

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