SAGGING SPOT MARKET PRICES SPAWN U.S. GAS FLOW CURTAILMENTS

Low wellhead prices on the spot market have prompted U.S. operators to curtail gas production.

Here are some examples:

Anadarko Petroleum Corp., Houston, will shut in about 150 MMcfd in Southwest Kansas, Oklahoma, West Texas, and the Gulf of Mexico.
Apache Corp., Denver, curtailed substantially all of its spot market sales in Oklahoma. Sales of more than 100 MMcfd by Oklahoma's biggest independent gas producer came to a halt Feb. 1. Anadarko and Apache chief executive officers called for tighter gas prorationing.
Brooklyn Union Exploration Co. and Smith Offshore Exploration Co., both of Houston, plan to curtail about 140 MMcfd of gas from jointly owned wells in the Gulf of Mexico capable of producing 180-200 MMcfd.
Amax Oil & Gas Inc., Houston, will shut in about 100 MMcfd of gas, about 40% of its production from company operated wells mostly in Texas, Oklahoma, Louisiana, and conventional wells in the San Juan basin of New Mexico and Colorado. Amax also is suspending gas well drilling until prices rise.
Plains Resources Inc., Houston, plans to shut in about 40 MMcfd, mainly along the Gulf Coast.
Mitchell Energy & Development Corp., Woodlands, Tex., in January shut in about 25 MMcfd because of low prices. Mitchell said its curtailments could double in February if prices don't increase. In the first 11 months of the fiscal year ending January 1992, Mitchell produced an average 246 MMcfd.
Unit Corp., Tulsa, shut in 80 gas wells Jan. 25, representing all of the company's spot gas sales in Oklahoma except for seven wells. Four or five gas wells in the Texas Panhandle were shut in as well.
Kaiser-Francis Oil Co., Tulsa, cut its Oklahoma gas production Feb. 1.
Forest Oil Corp., Denver, is considering shutting in about 15 MMcfd of its 85 MMcfd of production involving all gas that isn't under production payments or long term contract.

Anadarko's U.S. production averaged 386.2 MMcfd at an average price of $1.41/Mcf in first half 1991, down from 412.7 MMcfd and $1.66 in the same period of 1990. Apache's corresponding nationwide figures were 261.3 MMcfd, up from 248.6 MMcfd, and $1.58/Mcf, down from $1.73.

The volumes place them among the biggest U.S. independent gas producers (see table, OGJ, Oct. 21, 1991, p. 28).

Figures compiled by Natural Gas Clearinghouse, Houston, peg last month's U.S. spot gas prices at an average $1.61/MMBTU with a range of $1.35-1.70.

January 1991 spot gas prices averaged $1.74/MMBTU with a range of $1.45-1.90.

Industry sources said February spot prices and futures prices through next August dropped to less than $1/Mcf late in January. That confirmed producers' fears of sliding demand and sagging wellhead prices (OGJ, Jan. 6, p. 21).

'RIDICULOUS' PRICES

Anadarko Chairman Robert J. Allison Jr. said, "Prices offered by buyers in the February spot market are ridiculous.

"It seems today's spot prices are being influenced by New York Mercantile Exchange futures prices, which are being set by traders and market speculators who have no long term interest in our survival and who have no equity interest in gas reserves.

"The economics of gas exploration and production require a higher, more stable wellhead price if producers are to have the financial incentive to drill wells and develop new supplies of natural gas. Gas consumers will be poorly served by low prices that place producers in this untenable economic situation.

"We cannot and will not give away our stockholders' long term assets and sell discretionary gas volumes at today's low prices.

"Clearly, selling gas under these economic conditions constitutes waste of a valuable natural resource. Producing state regulatory agencies must consider gas prorationing to prevent continuation of this physical and economic waste."

Anadarko's productive capacity is about 600 MMcfd from about 3,000 gas wells. About half is discretionary production which can be shut in when prices dictate. The rest is mandatory production that includes casinghead gas, gas from joint interest wells with partners that won't curtail, and gas produced in prorationed fields.

"So, essentially, we will shut in as much as half our productive capacity when gas prices fall below a discretionary threshold," an Anadarko official said.

The company in 1989 stopped specifying the wellhead price below which it would begin curtailing discretionary production after purchasers began using the curtailment threshold as a ceiling price in negotiations.

POLICY SWITCH

Apache Chairman Raymond Plank called his company's curtailment an abrupt departure from prior policy.

The late January decision stemmed from a rapid slide in the wellhead price to $1.05/Mcf, off 75cts/Mcf in 60 days.

"The domestic exploration industry is in meltdown," Plank said.

"During what should be a peak demand period, producers are being offered prices that rival the decade-long lows of last summer. We decline to contribute to the demise of the domestic oil and gas industry by heaping additional gas supplies into this market.

"In the face of a national energy policy void, the only solution is action by several states to curtail gas equitably to meet demand and avoid an outright collapse of this industry, its infrastructure, and associated jobs that are currently helping to prop up the ailing U.S. economy."

MITCHELL POLICY

Producers say decisions to begin curtailing gas production depend on different factors for each operator.

Most start holding gas off markets when wellhead prices fall below replacement costs. But many variables affect net wellhead prices and, therefore, the price at which curtailments begin.

Mitchell often cites $1.50/Mcf as the price at which it will begin curtailing production. However, only about 40% of Mitchell's gas goes to the spot market. The rest is sold under firm, long term contracts for about $3/Mcf.

Mitchell is somewhat insulated from low gas prices because it buys more spot market gas than it sells. Spot market gas is used in the company's gas processing business.

"The low gas prices help our natural gas liquids business because they improve our processing margins, so we're not typical," Mitchell said. "We tend to be a little more aggressive on curtailing.

"If gas prices remain at $1-1.05/Mcf, we will definitely curtail more production in February."

A WARNING

"We have to do something or we are all going to be out of business," said Unit's Rick Foster.

Last year the company shut in gas production during February-September when prices fell below a company set floor of $1.25/Mcf. Foster noted the period when Unit shuts in its gas keeps starting earlier in the year.

Mike Moore, in the Kaiser-Francis marketing department, said wells that aren't in danger of having their reserves drained by offsets will produce just 4 days/month. He estimated the cut will cover about 50 wells that produce a total of 60-80 MMcfd.

The company is considering gas production cuts in other states as well.

"We fully endorse the notion of curtailing production under current conditions," said Robert S. Boswell, Forest vice-president and chief financial officer. Boswell pegs his company's replacement cost at about $2.50/Mcf.