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Natural gas rig counts to drop in mid-2011: Devon CEO



Houston (Platts)--11Aug2010/615 pm EDT/2215 GMT


Natural gas rig counts will begin to fall in the middle of 2011 if prices
continue to hover around $5/MMBtu, the president and CEO of Devon Energy said
Wednesday.

"Something isn't working right now, either the price has to come up or
costs have to come down for rig increases to be sustainable," said John
Richels, at a speech at the Petroleum Club in Houston.

In an interview with Platts after the speech, Richels said the increase
in rig counts is tied to producers trying to keep leases at unconventional
plays. Many of the leases were purchased in 2008 and are two- and
three-year deals.

Once many of the leases are renewed, the rig count should start to
decline, which should start occurring in the middle of next year, he said.

In his speech, Richels said that the industry is facing an unprecedented
economic reality -- $5 gas in both spot and forwards markets.

"The contango is out of the forwards market," he said. "We are going to
have to deal with some very difficult economics in this industry."

Some of the liquids-rich plays work with prices at this level, Richels
said. However, he added, most drilling activity is not in liquids-rich plays.

For most gas production, prices would have to reach $6-$7 to sustain
the rig increases, Richels said.

Richels also addressed Devon's move towards liquids, part of a trend of
independent producers in the industry.

"We've never really wanted to be just a natural gas company or just an
oil company," he said. "We always thought that having some kind of a balance
was a better thing in the long run."

Currently, Devon's reserves are 40% oil and condensates and 60% gas, a
split that the company would like to sustain in the future, he said.

In addition, Richels said, Devon's sale of foreign assets and
offshore production in the Gulf of Mexico has allowed it to become
"essentially debt free" and have "a lot of flexibility in how we deploy our
capitol."

Currently, Devon is focusing heavily on liquids and is keeping stakes
in key North American plays, he said.

FRACKING CHEMICALS

About 80% of the company's capital expenditure budget is going to
oil and condensate plays or plays enhanced by natural gas liquids, Richels
said. In addition, he said that Devon will continue to focus on unconventional
shale plays which have been "a huge revolution in this industry."

Devon has 4,300-4,400 wells in the Barnett Shale play and has leased
large amounts of acreage at other up and coming shales including the Avalon
shale primarily in New Mexico, the Cana/Woodford Shale in Oklahoma and the
Wolfberry Shale in Texas.

Richels also said the company's sale of offshore and foreign assets
has yielded about $8 billion in after-tax profits, compared to the $4.5
billion-$7.5 billion it expected. A few sales were still pending, he
cautioned.

In addition, Richels told Platts that Devon was not opposed to releasing
data on the chemicals used in hydraulic fracturing fluid, but does not think
the federal government should be involved, adding another layer of
unnecessary regulation.

US House Energy and Commerce Committee Chairman Henry Waxman has sent
letters to 10 producers, including Devon, looking for data on the chemicals
used in hydraulic fracturing fluid, policies about handling water after
drilling and other information.

Richels said that state agencies have done a good job in regulating
fracking operations. "We don't see the utility of the EPA involved at another
level," he said.

-- Eunice Bridges, eunice_bridges@platts.com

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