Beyond the Barnett: Energy industry eyeing other shales
Survival: That was a key message natural gas industry executives and analysts heard during a two-day conference in downtown Fort Worth last week.
The fourth annual Developing Unconventional Gas conference, or DUG2009, was hosted by Hart Energy Publishing at the Omni Fort Worth on April 7 and 8. The conference featured a range of speakers, including company chief executives, industry analysts and consultants, as well as exhibiting companies.
During the two-day conference, speakers mostly touched on a topic that concerns all oil and natural gas exploration companies: the economy and how itÂ’s affecting their bottom line.
“The E&Ps right now are a victim of their own success,” said Thomas Gardner, research director at Simmons & Company International, a Houston-based energy investment bank.
Natural gas producers have been so successful in drilling over the past several years that supply far surpassed demand, an undesirable situation only exacerbated by the recession.
“So if the cure is largely a reduction in supply, how long do we have to endure the pain?” he asked, before giving an answer many likely didn’t want: “Regardless of demand, 2009 essentially is a lost cause … Stay alive until 2010.”
Gardner outlined natural gas prices as a major factor in future development, and said those prices will determine how quickly supply and demand could fall back into line.
“Supply is driven by rig count, and rig count is driven by price expectations,” he said. “Our most recent work on threshold prices indicates that gas price expectations must remain above $8 to grow rig count, and above $7 to prevent the rig count from aggressively declining.”
Natural gas futures prices currently are about $3.67 per million British thermal units, and have been below $4 per MMBtu and for most days since February.
“We now have three rigs running and frankly I wish we didn’t have to run any rigs,” said S. P. “Chip” Johnson IV, president and CEO of Carrizo Oil & Gas Inc. “I don’t understand why anybody right now wants to drill, frac or bring production online when service costs are dropping and when the NYMEX strip is a $1.50 higher a year from now than it is now and you can lock that in, but we have operational and bank considerations and Wall Street considerations and rig contracts and leases to hold.”
In Texas, but looking elsewhere
Much of the attention during the Barnett Shale-hosted event was on newer shale players being developed elsewhere, notably northwestern LouisianaÂ’s Haynesville Shale and the Marcellus Shale of the northeastern United States. The latter runs through parts of New York, Pennsylvania and West Virginia, with the sweet spot, or core area, generally thought to be in southwestern Pennsylvania.
Several Barnett Shale operators have acquired large stakes in both shales; Chesapeake Energy Corp., XTO Energy Inc., Carrizo Oil & Gas, EOG Resources Inc. and Range Resources Corp. all have significant acreage in the Marcellus Shale, while Chesapeake Energy, XTO Energy, EOG Resources, EnCana Oil & Gas and Devon Energy Corp. have leasehold in the Haynesville Shale.
“We’re not in the Woodford or the Haynesville, though I wish we were,” Carrizo’s Johnson said.
Bill Marko, managing director at Jefferies Randall & Dewey, projects it will take about $850 billion for the wells on the top five shale plays: Arkoma Basin Woodford, Barnett Shale core area, Fayetteville core area, Marcellus and Haynesville. Add processing facilities and takeaway infrastructure and the bill tops $1 trillion.
For this reason, joint ventures – like Chesapeake Energy’s $3.375 billion deal with Norway’s StatoilHydro – will be necessary going forward. That aforementioned transaction, along with others involving BP America Inc., have persuaded the big integrated oil and gas exploration companies that shale plays are a worthy investment, he said.
“StatoilHydro and Chesapeake together want to carry this worldwide and look for shales worldwide,” he said, adding this advice for companies exploring mergers or acquisitions with their peers or larger integrated companies: “You just have to marry someone you can get along with.”
Industry estimates put the Barnett ShaleÂ’s potential at about 50 trillion cubic feet of natural gas.
“The ultimate size of the Haynesville and the Marcellus is world-class,” Marko said. “I don’t exactly know what it’s going to turn out to be, but it’s going to be north 150 Tcf each, which are world-class – top shale plays in the world.”
