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.

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