Unconventional gas resources changing more than markets

Bob Tippee

Development of unconventional gas resources is overhauling more than markets. It’s changing companies, too.

The market changes become more obvious every day. Resource potential is a diminishing concern. The main driver of supply is drilling economics.

Only a few years ago, the dominant assumptions were that operators had to drill feverishly just to hold production steady and that LNG imports had to expand to meet whatever demand growth occurred.

Now, the main drilling pressures on any given producer are lease obligations and production expectations of investors. With North American gas prices well below energy-equivalent oil values and likely to stay there, LNG once expected to stream into the US is instead competing for sales elsewhere, globalizing the price weakness.

Unconventional-gas producers now must focus on “low-cost operational excellence,” says a new report from the Deloitte Center for Energy Solutions. That focus becomes transformative.

The independent producers that led development of unconventional resources are shedding properties to raise cash and concentrate on core assets. They’re using technological and organizational improvements to lower costs. They’re taking a manufacturing approach to their work, applying “lean process” principles to cut cycle times and lower direct costs of each well. And they’re developing strategic relationships with contractors in response to high demand for services and supplies.

As the pioneers become leaner and more focused, Deloitte says, large international independents, majors, and national oil companies are pursuing new business models to join the action.

They are, for example, forming partnerships with and in some cases acquiring independents already active in unconventional gas development. They’re also looking for ways to apply methods developed in the US to unconventional resources elsewhere in the world.

The Deloitte study offers many examples, too numerous to include here, for each of these changes.

But the point is clear: Unconventional resources are reshaping a whole industry along with its markets.

And the expectation of this writer is that the changes have only begun.

(Online Aug. 27, 2010; author’s e-mail: bobt@ogjonline.com)

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