US gives gas extra attention as output grows from shales

Jan. 5, 2009
US natural gas, particularly shale gas, will receive increasing attention in 2009 because crude oil is becoming increasingly difficult and expensive to find and produce.

US natural gas, particularly shale gas, will receive increasing attention in 2009 because crude oil is becoming increasingly difficult and expensive to find and produce.

Natural gas also is becoming more attractive for investors given worries about greenhouse gas emissions. Although the future direction of climate policy remains unclear, it’s likely US President-elect Barack Obama will push for better energy efficiency and for lower GHG emissions.

Natural gas has an advantage among fossil fuels, pending the development of alternative energy, because of its low carbon-to-hydrogen ratio. Gas also appears to be a practical and perhaps one of the most immediate ways for the US to increase energy production.

The fastest growing gas production has come from shale plays through the advancement of horizontal drilling and hydraulic fracturing.

Barnett slowing

Now, the dynamics of the shale gas boom are evolving with a definite move toward emerging plays and gradually away from the first gas shale formation to widely receive attention—the Barnett shale in North Texas.

During 2008, companies slowed their Barnett shale drilling, creating the potential for declines in overall production starting in early 2009. Continued drilling cuts are likely, given the sluggish economy and price volatility.

Drilling in the Barnett will not come anywhere near to a halt, but well completions could slow to the point of stalling production growth there. Barclays Capital reports that the Barnett shale accounted for more than 5% of total Lower 48 gas production in 2007. This contrasts with nominal production from Barnett just 10 years ago.

Producers report that Barnett shale horizontal wells remain economical but that the proliferation of these wells is apt to slow during overall drilling spending constraints as companies reduce their budgets.

Emerging plays

The US contains more than 20 shale basins spread across that many states. Emerging plays include the Fayetteville shale of north-central Arkansas, the Haynesville shale of northwestern Louisiana, and the Marcellus shale in the Appalachians.

EOG Chairman and Chief Executive Officer Mark Papa calls horizontal drilling a “game changer” for US land operations. He notes that the technology is migrating to Canada, and EOG has expressed optimism about the potential of British Columbia’s Horn River basin.

Papa expects that horizontal drilling and fracing techniques developed in the US eventually will be used in other parts of the world on similar shale deposits.

In the Fayetteville play, Chesapeake Energy Chief Executive Officer Aubrey McClendon wants to keep over 20 rigs busy despite the company’s plans to reduce drilling elsewhere.

Chesapeake plans to trim the number of rigs running to 110-115 companywide by the first quarter of 2009. McClendon told listeners on a recent conference call that the Fayetteville shale region is one of the least expensive drilling areas in the nation.

Marcellus shale

In the Marcellus, Range Resources Corp. Chief Executive Officer John Pinkerton expects exploration to increase during 2009. Range, Exco-North Coast Energy, and Chesapeake are among active Marcellus operators.

The Marcellus is found under much of Ohio, West Virginia, Pennsylvania, and New York. It’s a potentially rich supply close to New Jersey, New York, and New England that awaits investment in pipelines and processing plants.

One disadvantage for the Marcellus is that companies are sorting out permitting delays. The Pennsylvania Senate Majority Policy Committee held a public hearing on the subject in November.

Marcellus drilling is in its infancy, Ray Walker, junior vice-president of Range Resources Appalachia LLC, said at that hearing. He estimates 50-60 horizontal wells and about 200 vertical wells have been drilled in the Marcellus in 2 years.

“More than $2 billion has already been invested in Pennsylvania during the past year for lease acquisition and drilling,” Walker said. “A similar amount may be invested in 2009, probably with less emphasis on lease acquisition and more on drilling, which means more jobs and economic growth.”

Walker and representatives of other oil companies asked Pennsylvania for a streamlined, predictable regulatory environment to make the Marcellus competitive with drilling opportunities in other states.

It seems likely that the Pennsylvania legislature will work to ensure development of the Marcellus shale. One issue of interest will be how permitting unfolds for water needed for fracing.