Drilling efficiency is impacting gas production in North America

The natural gas sector has been undergoing some fundamental changes the past few years due in part to technological innovations and also because of the development of unconventional shale gas resources. These changes are already affecting how industry participants go about their business.

Speaking at a conference in Montreal last month, EnCana's Dave Thorn said that the economical recovery of shale gas has been a "game changer" for the industry. He noted that reserve life estimates have increased dramatically over the past two years and said that supplies could increase further over time. Ultimately, Thorn estimated that North American gas supplies could rise by about 25 bcf per day.

Other speakers from the producer side were equally bullish with respect to reserves and production, saying that the natural gas supply picture looks very strong, but expressed concern about market risk. Gas demand has grown slowly during the current recession, and the role of natural gas in the global economic recovery is still uncertain.

If gas prices hold at or below $6/MMBtu for a lengthy period while crude oil trades at $70 or above, it would be a golden opportunity for compressed natural gas to gain market share as a transportation fuel, said Thorn. At current prices, compressed natural gas is about 30% cheaper than gasoline or diesel in the US and Canada.

BENTEK Energy, which tracks monthly trends in drilling and production, released a report recently that points out breakthroughs in drilling technology and higher flows from unconventional gas wells are driving production increases even though the active rig count fell 50% over the past year. Their conclusion is that natural gas production now has more to do with rig efficiency than the absolute number of rigs.

"The historic correlation between rig count and gas production rates began to fail midway through 2008 and completely broke down in 2009," said Rusty Braziel, BENTEK managing director. "We saw the rig count fall more than half in less than six months – from a peak of 2,569 rigs in October 2008 to a low of 1,146 rigs in May 2009, as measured by RigData. Yet natural gas production has been up nearly 4%, or 2.1 bcf per day in 2009." To explain these new industry dynamics, Colorado-based BENTEK has developed a new drilling index they call the BENTEK Rig Productivity Index, or BPI, which the company says takes into account not only the actual rig count, but also the impact of technological advances and efficiency gains per rig on current and future production in order to better predict future production. The BPI shows an "effective rig count" that is much higher than the actual number of working rigs. For example, on Oct. 28, BENTEK's BPI was 2,764, although the actual rig count that day was just 1,356.

"Another way to understand the BPI is that 1,356 rigs are producing today the way 2,764 rigs would have produced in 2005 [the benchmark year for the BPI]," said Tom Sherman, a senior energy analyst at BENTEK.

The technological advances in horizontal drilling and well-completion methods, as well as a better understanding of how to unlock gas from unconventional resources, especially shale, have enabled the industry to do much more with less.

Mark Quartermain, president of Shell Energy North America, noted at the Montreal conference that just a few years ago, people were worried about a permanent decline in North American gas production. LNG was seen as a possible solution to this decline, he said, adding, "It is increasingly clear that LNG might not be as needed in this market as previously thought."

Quartermain hastened to add that in such a volatile environment forecasting is difficult, and the gas industry should be prepared for anything.

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