Constraints noted on US gains in gas production

May 2, 2005
US producers expect to continue aggressive natural gas drilling programs this year in response to growing demand and higher commodity prices.

US producers expect to continue aggressive natural gas drilling programs this year in response to growing demand and higher commodity prices. But they warn that rising operating costs and the need to drill in increasingly complex formations that yield less gas per well will limit production gains.

“To the extent we can do it, the industry is making the most of its opportunities,” said Joseph Blount, chairman of the Natural Gas Supply Association and president of Unocal Midstream and Trade.

Citing figures from Oil & Gas Journal’s Capital Spending Outlook, he said that US upstream capital expenditures are expected to grow to $65.9 billion in 2005 from $62.3 billion in 2004 (OGJ, Apr. 4, 2005, p. 20).

Gas-directed rig counts, as measured by Baker Hughes Inc., are at a 20-year peak onshore, while the US Energy Information Administration reports gas well completions reached a record 23,647 in 2004, Blount said during a briefing sponsored by NGSA and the Canadian Association of Petroleum Producers.

But oil field service and drilling costs are going up too, he added. Costs per well climbed 82%, in 2005 dollars, from $582,510 in 1992 to $1,057,510 just 10 years later. Onshore day rates have grown to almost $9,000 currently from approximately $6,000 during 2003’s second quarter.

Expenses continue to grow as coalbed methane (CBM) and tight sands gas take a bigger share of total US drilling, according to Blount. “Forty percent of the current Lower 48 gas base is in unconventional tight stands and coalbed methane,” he explained. “Because reserves are not as concentrated as in more conventional formations, a lot more wells need to be drilled.”

Canadian producers also are reinvesting in gas drilling at record rates and expanding into CBM and other emerging resources, noted CAPP Chairman Ross Douglas, who also is president and CEO of Mancal Energy Inc., Calgary.

“In 2004, Canadian natural gas production increased by 400 MMcfd and is again higher for the first quarter of 2005,” he said. The country, whose exports represented 15% of total US gas supply in 2004, still has about half of its conventional gas resource base left, he said.

Addressing concerns that Canada’s growing oil sands production will reduce gas available for export, Douglas pointed out that technology is lowering the gas required per barrel of oil produced.

CBM’s contribution to total Canadian production, while expected to reach 1.3 bcfd by 2010, is still relatively small. “Canada is still in its infancy, probably 15 years behind the United States,” Douglas said.

LNG prospects

LNG imports also are a growing, although more costly, option in Canada and the US, the two producers said. NGSA’s Blount said that each new terminal could cost up to $500 million, including up to $100 million for purchasing land, designing the facility, and obtaining construction and operating permits.

The association estimates that $44.5 billion will be required for 6.2 bcfd of incremental imports by 2010, including $2.5 billion for US terminals, $18 billion for LNG tankers, $13 billion for liquefaction plants, and $10.8 billion for gas field development, processing, and transmission.

“The fact that more than 40 LNG terminals have been proposed shows we don’t have enough access to new supplies to meet growing demand,” Blount said.