Shale gas supply expected to keep US prices low in 2011

Bob Tippee
OGJ Editor

HOUSTON, Dec. 3 -- While another year of price distress awaits US producers of natural gas from shale reservoirs, technology has lowered breakeven thresholds of important plays, speakers said at an industry conference in Houston.

Beyond next year, said Dan Pickering, copresident of Tudor, Pickering, Holt & Co. LLC, $4/Mcf gas is unsustainable. In the long term, he explained, a commodity’s price must cover the highest cost in the most expensive 25-30% of supply needed to meet demand. For that part of the projected supply spectrum in 2013, Pickering said, the breakeven price with a 10% before-income-tax rate of return ranges from just less than $6/Mcf to slightly more than $8/Mcf.

Pickering told the Decision Strategies Oilfield Breakfast Forum that current price weakness results from a supply jump rooted in surprisingly high levels of drilling and drilling efficiency since 2009.

Despite low gas prices, drilling stayed high in 2010 because of lease obligations, protection of producers against price weakness by hedges, and a surge in the formation of joint ventures with drilling commitments.

Those factors will begin to subside in 2011, Pickering said. For example, less production will be hedged, so “industry will be much more exposed to gas prices in 2011” and therefore more inclined to reduce drilling if prices stay low.

Meanwhile, the electric power generation market will have to absorb a gas surplus that Pickering estimates at 1.5 bcfd in 2011, meaning gas prices will have to stay low enough to displace coal.

“This is the driving relationship for 2011,” he said, voicing a “muted expectation” of an average gas price of $4-5/Mcf for the year.

“We have to watch the rig count,” he said. “A rig count at current levels [means] too much gas for the indefinite future.”

Lowered breakeven prices
Amerino Gatti, vice-president of Schlumberger’s Reservoir Production Group, said technological progress has lowered the gas price at which shale-gas investments become economic to $5/Mcf in many basins and to $4/Mcf in the Marcellus and Fayetteville plays.

Gatti said increased fracture intensity has improved production efficiency in most plays but added, “The industry is still working to strike the right balance between stages, productivity, and economics.”

A Schlumberger analysis of production logs from more than 150 wells in the Woodford, Barnett, Fayetteville, Haynesville, Eagle Ford, and Marcellus shales confirms the variability of reservoirs and production patterns.

“Production is not uniform in horizontal shale gas reservoirs,” Gatti said. About 30% of the perforation clusters in the wells studied contributed no production. Results vary by region.

Petrohawk’s experience
Richard K. Stoneburner, president and chief operating officer of Petrohawk Energy Corp., cited lessons his company has learned as it exits some unconventional gas plays to focus on the Haynesville and Eagle Ford shales.

“Geology matters, and the earlier you know, the better,” Stoneburner said. “If you get the geology right, get the planning and the capital commitment right.”

Then, he said, “get the engineering commitment right” by optimizing fracture stimulation and production practice.

In the Haynesville play, Petrohawk has raised estimated ultimate recovery (EUR) to a projected 10 bcf/well from an average 7.5 bcf/well through reservoir optimization, including restricted flow rates and improved frac designs.

Rate restriction, Stoneburner said, addresses concerns about embedment and proppant deformation. The practice has reduced first-year production decline by about 50%, stabilized base proved-developed-producing decline, and deferred the need to install fieldwide compression.

Optimization of frac design increases net present value per well, improves EUR over time through continual modification, and relates stimulation design to geology and regional well performance.

Calling the past 2 years “truly historic,” Stoneburner said the industry has discovered the equivalent of 500-1,000 tcf of gas in the Marcellus, Haynesville, and Eagle Ford shales. Most of the accomplishment, he said, came from mid-sized independent producers working under requirements of leases that typically have 3-year primary terms.

“When this period of lease capture is complete, companies with positions in the core of these plays will have established a legacy of assets that will provide decades worth of risk-free drilling with the potential to change America’s energy future,” he said.

In addition to focusing on two shale plays, Petrohawk is shifting investment toward liquids-rich prospects in the Eagle Ford play and away from dry-gas prospects in the Haynesville while gas prices remain low, Stoneburner said.

Business and politics
Chris Reinsvold, Decision Strategies chief executive officer, said unconventional resources require a business approach different from conventional plays.

“Learning and operational efficiency are key to business success” in unconventional plays, Reinsvold said.

He said risk mitigation and value maximization plans should incorporate relevant uncertainties and clear decision points.

He described a business approach that allows for exit at critical stages, such as if the resource proves disappointing during exploration, if pilot wells during evaluation show recovery to be deficient, and if pilot tests prove during delineation to have generated “false positives.” Only if the project still appears profitable after passing those decision points should the producer move to development, the “factory phase” phase of unconventional operations, Reinsvold said.

John D. Jensen, senior-vice president, operations, of El Paso Exploration & Production Co., said the abundance of hydrocarbons from shales will enhance the attractiveness of gas by stabilizing price.

He said an “evolution” in energy policy and physics from “high-carbon, low-tech to low-carbon, high-tech” should open markets for new gas supply.

But he urged industry representatives to help policy-makers understand the potential supply and environmental benefits of gas.

“We’re failing to tell our story as an industry,” Jensen said. “It’s our job to educate people.”

Contact Bob Tippee at bobt@ogjonline.com.

Related Articles

WAFWA: Aerial survey finds lesser prairie chicken population grew

07/06/2015 A recent range-wide aerial survey found the lesser prairie chicken population rose 25% from 2014 to 2015, the Western Association of Fish & Wil...

Production ramps up from Sunrise oil sands project

07/06/2015 Husky Energy Inc., Calgary, reported that 25 well pairs are now on production at its Sunrise oil sands project in northeastern Alberta. Steaming is...

CERI: Energy, operational efficiencies possible in Canadian oil, gas

07/06/2015 Measures can be taken by operators in the expanding resource-intensive Canadian oil and gas sector to improve both energy efficiency and operationa...

Statoil installs subsea wet gas compressor at Gullfaks

07/06/2015 Statoil SA installed what it is calling the world’s first subsea wet gas compressor at its Gullfaks C platform offshore Norway. By compressing at t...

Newfoundland, Labrador prepare for deepwater exploration

07/06/2015 Canada-Newfoundland and Labrador Offshore Petroleum Board's (C-NLOPB) most recent call for bids for the Eastern Newfoundland Region is coming to a ...

Group suggests principles for Alberta royalty review

07/06/2015 The Canadian Association of Petroleum Producers (CAPP) has suggested that four principles guide Alberta in an oil and gas royalty review planned by...

Giant Perla field flows gas off Venezuela

07/06/2015

A 50-50 joint venture of Eni SPA and Repsol SA has started production from giant Perla natural gas field in shallow water offshore Venezuela.

Big data, more oil

07/06/2015 Development of unconventional resources soon will enter a phase promising to lower the cost of producing oil from shale toward levels normally asso...
White Papers

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by
Available Webcasts


OGJ's Midyear Forecast 2015

When Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Predictive Analytics in your digital oilfield - Optimize Production Yield and Reduce Operational Costs

When Tue, Jul 7, 2015

Putting predictive analytics to work in your oilfield can help you anticipate failures, plan and schedule work in advance, eliminate emergency work and catastrophic failures, and at the same time you can optimize working capital and improve resource utilization.  When you apply analytic capabilities to critical production assets it is possible to reduce non-productive time and increase your yield.

Learn how IBM's analytics capabilities can be applied to critical production assets with the goal of reducing non-productive time, increasing yield and reducing operations costs.

register:WEBCAST



On Demand

Cognitive Solutions for Upstream Oil and Gas

Fri, Jun 12, 2015

The oil & gas sector is under pressure on all sides. Reserves are limited and it’s becoming increasingly expensive to find and extract new resources. Margins are already being squeezed in an industry where one wrong decision can cost millions. Analyzing data used in energy exploration can save millions of dollars as we develop ways to predict where and how to extract the world’s massive energy reserves.

This session with IBM Subject Matter Experts will discuss how IBM Cognitive Solutions contribute to the oil and gas industry using predictive analytics and cognitive computing, as well as real time streaming for exploration and drilling.

register:WEBCAST


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected