Conoco to Cut Gas Production too...But How Much Difference Will it Make?

ConocoPhillips announced yesterday that it will shut in production on about 4% of its natural gas in North America and divert capital to oil and liquids areas such as the Eagle Ford Shale.  Conoco, which a very limited presence in the Haynesville Shale, is limited in how much gas it can shut in because 2/3 of its gas is associated gas from oil drilling and much of the company's production is done in partnership with other companies that don't want to lose the cash flow.

While it's good to see producers taking proactive steps to reduce the supply glut, I question if it will have any net impact because the producers are using the same resources to pursue oil and liquids, which yield associated gas.  There may be a net negative impact to gas production, but it will be less than advertised.

Another producer, Continental Resources, which is highly focused on drilling for oil in the Bakken Shale, will see a dry gas production increase of 28% largely because of associated gas from oil drilling.  When you drill for oil, you usually get gas too.

EIA: Storage -192 Bcf to 3.098 Tcf

The weekly storage level finally took a big dip this week, after a month of badly lagging historical averages.  Last week saw a net withdrawal of 192 Bcf, bringing the level to 3.098 Tcf.  The withdrawal was 4% greater than last year (184 Bcf) and 11% better than the five year average (-173 Bcf).  Given the narrow "win," the storage levels still have a long, long way to go to catch up, something that looks impossible this year.  The current storage level is 20.7% above last year (2.751 Tcf) and 21.4% above the five year average (2.551 Tcf).

Temperatures last week were slightly above average, 1.1 degrees above the 30 year average and 1.0 degrees warmer than last year, so it's a good thing that the weekly withdrawal slightly beat prior averages.

New Louisiana Completions

• Cotswold 17-16-10 H #1, Chesapeake Operating: 13.272 MMcf/day IP on 22/64 in. choke at 5,989 psi; Perfs: 11,422-15,830, length: 4,408 ft.; Elm Grove Field, Bossier Parish, S20/T16/R10; res. A, serial #243159
• MLJ LLC 6-16-10 H #1, Chesapeake Operating: 13.512 MMcf/day IP on 22/64 in. choke at 6,248 psi; Perfs: 11,478-15,846, length: 4,368 ft.; Elm Grove Field, Bossier Parish, S6/T16/R10; res. A, serial #243305
• DSK 31-16-10 H #1, Chesapeake Operating: 14.208 MMcf/day IP on 22/64 in. choke at 6,500 psi; Perfs: 12,118-16,577, length: 4,459 ft.; Elm Grove Field, Bossier Parish, S31/T16/R10; res. A, serial #243343

Chesapeake Cutting Back Gas Operations

In response to record low natural gas prices, Chesapeake Energy is altering its operating strategy to cut back its gas operations.  First, it will slash gas rig counts.  Chesapeake currently operates 47 gas rigs (down from an average of 75 in 2011), and the reduction to 24 rigs should happen in the second quarter.  The Haynesville rig count should drop to six at that point, with the remainder being split between the Barnett (6) and Marcellus (12) Shales.

Dropping rigs leads to lower production in the future, but to get a more immediate impact, the company will postpone some completions and hold off on connecting completed wells to pipelines.  To make the most immediate impact, Chesapeake will curtail production by 0.5 Bcf/day (currently 6.3 Bcf/day, gross) and might decide to up that curtailment to 1.0 Bcf/day.  Most of this curtailment will take place in the Haynesville and Barnett, so the company expects to report production declines in both plays this year.

As one would expect, the savings will be channeled to the company's oil and liquids production, blah, blah, blah. You can fill in the rest of that.

Chesapeake also announced that it would spend only $1.4 (net) on undeveloped leasehold expenditures.  It spent $3.4 billion in 2011 and $5.8 billion in 2010 on leases, so this is a big drop. But perhaps the biggest change is that all of the money will be spent in existing plays, so don't look for the next big shale play to come from CHK in 2012.  At least that's what they say now.

While this is a hard pill to swallow for folks in the Haynesville, at least it is action to address the overflow gas supply situation that will hold prices down for the foreseeable future.  Unfortunately, redirecting capital to liquids production will lead to the production of an unknown quantity of associated gas, so I'm not sure what the net impact to gas production will be from these actions other than less money flowing into LA and TX.

Haynesville Shale Rig Count: -5 to 83

The weekly Haynesville Shale rig count decreased by five to 83.  Louisiana was down five to 53, while Texas held at 30.

SUUUUUUUPER FRACK!

It's not exactly the next superhero residing in the Hall of Justice, but for gas drillers, the new "super fracking" techniques being developed by the big oilfield services companies like Schlumberger, Baker Hughes and Halliburton are something to cheer about.  New technologies can supposedly save producers millions in well costs while enabling them to produce more gas.

While some fracking opponents are not happy about these nascent techniques, they don't seem to be anything different than regular fracking outside of what goes on thousands of feet underground.  

But one potential downside is that it might make gas production economic for producers at even cheaper prices.  Whoopee!  Just what we need: more cheap gas.

Blame The Weatherman

This morning, my wife was complaining about our unusually warm winter, "I've got all these new sweaters that I want to wear but can't."  Awesome.  So the warm weather is destroying the price of natural gas and now we've got a trove of new unworn sweaters clogging the closet - a lose-lose situation if ever there were one.

I've been complaining about the storage and price situation a great deal this week, but it's damn hard to burn natural gas when last week's temperatures were 13.1 degrees higher than last year and 9.1 degrees higher than the 30 year average. For gas fans, this is an ugly map:

U.S. Rig Count: +21 to 2,008

The weekly Baker Hughes U.S. rig count showed a 21 rig increase, bringing the number of working rigs to 2,008.  Oil rigs increased by 32 to 1,123, gas rigs declined by 11 to 780 and miscellaneous rigs held at five.  By type, horizontal rigs were up 22 to 1,183, vertical rigs were up six to 619 and directional rigs were down seven to 206.

Currently, there are 443 fewer gas rigs than oil rigs.  This is a pretty remarkable development considering that four years ago there were 1,134 more gas rigs than oil rigs, a net swing of 1,577 rigs.  During that time the rig count has increased by only 234 rigs.  Three and a half years ago when the total rig count was almost equal to today's, the disparity was even greater with 1,199 more gas rigs than oil rigs working.  My, how things have changed!

New LA Completions: Bienville, Caddo & Red River

The Louisiana DNR finally caught up on its lagging completions reporting in a big way with 58 new completions and a bunch of completions I've already reported that needed some back-fill.  I've broken up the completions data into three groups of parishes as you will see from the posts below as a service to anyone who actually reads them.  The spreadsheets and maps are updated.

• Turner et al 34-16-9 H #1, QEP Resouces: 10.565 MMcf/day IP on 16/64 in. choke at 8,400 psi; Perfs: 12,510-17,070, length: 4,560 ft.; Alabama Bend Field, Bienville Parish, S3/T15/R9; res. A, serial #242187

New LA Completions: DeSoto

• L Billingsley 5 #2, BEUSA Energy: 5.721 MMcf/day IP on 9/64 in. choke at 8,000 psi; Perfs: 11,699-16,140, length: 4,441 ft.; Bethany Longstreet Field, DeSoto Parish, S5/T12/R15; res. B, serial #241071
• L Billingsley 58 #1, BEUSA Energy: 6.384 MMcf/day IP on 10/64 in. choke at 7,700 psi; Perfs: 12,095-16,602, length: 4,507 ft.; Bethany Longstreet Field, DeSoto Parish, S5/T12/R15; res. B, serial #241222
• Billingsley 4 #2, BEUSA Energy: 5.863 MMcf/day IP on 10/64 in. choke at 7,790 psi; Perfs: 11,682-16,200, length: 4,518 ft.; Bethany Longstreet Field, DeSoto Parish, S4/T12/R15; res. B, serial #241324

New LA Completions: Sabine & Natchitoches

• Crest 5 H #1, Samson Contour Energy: 6.191 MMcf/day IP on 12/64 in. choke at 7,744 psi; Perfs: 13,048-17,742, length: 4,694 ft.; Grogan Field, Natchitoches Parish, S5/T10/R10; res. A, serial #243676
• Evans 18-9-12 H #1, Chesapeake Operating: 14.324 MMcf/day IP on 22/64 in. choke at 7,590 psi; Perfs: 12,845-17,344, length: 4,499 ft.; Bayou San Miguel Field, Sabine Parish, S18/T9/R12; res. A, serial #242811
• Olympia Min 32 #1, SWEPI, LP: 20.417 MMcf/day IP on 24/64 in. choke at 8,100 psi; Perfs: 13,060-17,643, length: 4,583 ft.; Bayou San Miguel Field, Sabine Parish, S32/T9/R12; res. A, serial #243450

Storage: Up, Up, Up; Prices: Down, Down, Down

It's been hard to watch natural gas prices plummet over the past few weeks as storage levels have remained stubbornly high.  A reader makes a good point in a comment today that it's especially difficult to watch this story when we are comparing current data to averages that are themselves bloated.  Because the five year average that is used as a standard comparison is a rolling average of the previous five years, the record levels of storage for the past three years have served to skew that average upwards making it a less useful measure.

As the table below shows, the current maximum average storage level for the past five years was 3.705 Tcf.  Back in 2005, it maxed out at 3.106 Tcf, a 599 Bcf difference from today.  Of course, since then there has been new storage added, but the trend is clear.

To make your stomach churn, the current storage level is 3.29 Tcf, 184 Bcf higher than the maximum average from 2005, and we are eight weeks into the withdrawal season that got off to a late start.  If you're like me, you need to see it as a picture for it to sink in.  Here it is, grab your barf bags, put your head between your knees and prepare for a very rough ride.

EIA: Storage -87 Bcf to 3.29 Tcf

The weekly EIA working gas in storage report showed an 87 Bcf decrease to 3.29 Tcf, which is WAY TOO HIGH. The weekly injection was 62% less than last year (-228 Bcf) and 46% below the five year average (-162 Bcf). The current level is 19.6% above last year and 20.8% above the five year average.

Only One New Texas Permit This Week

Not much new Haynesville Shale permit activity in Texas for the past month.  Running out of ideas or just a slow filing time?

1/9/12 - 1/16/12:

• CGU 10 #53HH, Anadarko E&P; Carthage Field (Haynesville Shale), San Augustine Co. Co., Survey: DUNCAN, S, A-158

New Texas Completions

1/10/11 - 1/17/11:

• Walker SU H #1H, EXCO Operating: 13.674 MMcf/day IP, 16/64" choke, 10,105 psi; Perfs: 14,966-19,947, length: 4,981 ft.; Carthage Field (Haynesville Shale), Nacogdoches Co., Survey: WALKER, J, A-57
• CGU 12 #51HH, Anadarko E&P: 3.615 MMcf/day IP, Adj./64" choke, 3,515 psi; Perfs: 11,143-14,741, length: 3,598 ft.; Carthage Field (Haynesville Shale), Panola Co., Survey: WHITE, JA, A-749
• CGU 12 #16HH, Anadarko E&P: 4.098 MMcf/day IP, Adj./64" choke, 3,851 psi; Perfs: 11,137-14,866, length: 3,729 ft.; Carthage Field (Haynesville Shale), Panola Co., Survey: WHITE, JA, A-749

Haynesville Shale Rig Count Unchanged at 88

The Haynesville Shale rig count was unchanged at 88.  Louisiana held at 58 and Texas held at 30.

U.S. Rig Count: -20 to 1,987

The weekly Baker Hughes rig count showed a 20 rig decrease, bringing the number of working rigs to 1,987.  Oil rigs held at 1,191, while gas rigs were down 20 to 791 and miscellaneous rigs held at five.  By type, horizontal rigs were up one to 1,161, vertical rigs were down 18 to 613 and directional rigs were down three to 213.

The number of gas rigs is at its lowest point since January 2010, but it is still above its lowest recent level of 665 in June 2009.  While we definitely need to see a reduction in gas rigs to see any upward bump in gas prices, I would argue (actually, have been arguing) that a drop in gas rig count will not directly correlate with a reduction in gas supply and therefore an improvement in prices.

Mid-Bossier Shale Data Updated

I updated the Mid-Bossier Shale completions list and map today.  I added a few wells that I noticed in recent days.  When looking at this data, remember the caveat that because there is no separate classification for Mid-Bossier wells, all of the data on this list is gleaned from my research/estimation as well as from investor presentations and hearsay.  Interestingly, much of the data from investor presentations is about competitors' Mid-Bossier locations.

EIA: Storage -95 Bcf to 3.377 Tcf

The weekly EIA working gas in storage report showed a 95 Bcf decrease, bringing the level of gas in storage down to 3.377 Tcf.  The weekly withdrawal was considerably lower than last year (-31%) and the five year average (-26%), but it is not as terrible as it has been for the past couple of weeks (that's looking really hard for a bright side).  But with the weak withdrawal, the current storage level continues to fall behind last year (+13.4%) and the five year average (+17.0%).

With each successive week of not beating prior years, it becomes harder and harder to get storage down to a level to allow for a normal injection season in summer and fall.  At the current rate of withdrawal, unless there is a major cold snap or an extra long winter that leads to huge consumption levels, it looks like we will see storage max out in late fall.  If that happens look for production curtailments.  When the tank is full, it's full.

As in weeks before, the culprit for the weak storage numbers was warm temperatures.  Last week, temperatures averaged 4.6 degrees above last year and 4.6 degrees above the 30 year norm.

Another LNG Import Project Bites the Dust

For the past decade, the owners of the proposed Crown Landing LNG project bitterly fought opponents to the project for the right to build an LNG import facility on the banks of Delaware River in New Jersey.  One case ended up in the Supreme Court.  But after all that work and all that fighting, it was low natural gas prices and abundant domestic gas supplies that finally killed the Crown Landing project.

The project was initiated by BP in 2002 and was purchased by Hess in 2009.  No word yet if Hess is looking at an export facility for the location, much like Dominion's Cove Point facility in Maryland (the difference being that Cove Point already is a functioning import terminal).  Given the level of opposition, it seems unlikely, but it sure is close to the Marcellus Shale...

LA Completions Update

There was only one new completion reported this week by the LA DNR:

• Moran 26 #4-ALT, EXCO Operating: 18.664 MMcf/day IP on 22/64 in. choke at 7,734 psi; Perfs: 12,675-16,983, length: 4,308 ft.; Kingston Field, DeSoto Parish, S26/T14/R13; res. A, serial #243393

But the DNR is starting to catch up on some of its backlog from not having stayed current with reporting new completions for the past several weeks.  I've back-filled some of the data for about 45 previously reported completions on the spreadsheets but am waiting another week to update the maps so they won't have any data gaps.

Steel Plant Re-Opening in Youngstown Thanks to Shale

Youngstown, OH was particularly hard hit by the loss of manufacturing jobs in the U.S., so much so that the city lost more than half its population since 1950 and the city's leaders have been working to shrink the footprint of the city to better provide services.  Now comes news that the famed Youngstown Sheet & Tube plant will re-open 34 years after it closed as a symbol of Youngstown's decline.

The re-opening comes thanks to shale gas, specifically the need for seamless pipe to drill in the Utica and Marcellus Shales in Ohio, Pennsylvania and West Virginia.  One big difference is that the mill will have foreign ownership (France's Vallourec SA owns the plant now through its subsidiary V&M Star), but it will employ 350 U.S. workers.

While you can argue about the specific economic impact calculations and debate the issue of hydraulic fracturing all day, the reopening of this factory offers an anecdotal glimpse of what a huge domestic growth industry shale drilling is and can be.

Bullish on Natural Gas Prices?

I'm bullish on the long-term future of natural gas but less so on its price.  Chesapeake Energy, on the other hand, is dispensing the Kool-Aid, urging us to be bullish on both.  (Mmmm, I'll take cherry.)  In its most recent investor presentation, the company lays out the argument for a recovery of natural gas prices in the intermediate and long-term.

The presentation makes many of the same arguments I've made in these pages, but it leads with one I don't quite buy.  CHK suggests that once producers fulfill their requirements to hold leases and move towards liquids and oil in their production base they will have little reason to go back and drill cheap gas, and therefore prices will rise.  That makes sense on the surface, but I don't think it holds up to scrutiny for several reasons.

Only One New Texas Permit in Past Two Weeks

I don't know if it was slow around the holidays or what, but there was only one new Haynesville Shale drilling permit approved in Texas between 12/23/11 and 1/9/12:

• Longhorns (SL) DU #1HB, XTO Energy; Carthage Field (Haynesville Shale), Nacogdoches Co. Co., Survey: YBARBO, JI, A-60

New Texas Completions

12/28/11 - 1/9/12:

• Thundering Herd (SL) DU #1H, XTO Energy: 11.119 MMcf/day IP, 15/64" choke, 9,484 psi; Perfs: 14,565-19,153, length: 4,588 ft.; Carthage Field (Haynesville Shale), San Augustine Co., Survey: SINCLAIR, C, A-453
• Thundering Herd (SL) DU #1HB, XTO Energy: 11.222 MMcf/day IP, 15/64" choke, 9,106 psi; Perfs: 14,055-18,903, length: 4,848 ft.; Mid-Bossier Field (Haynesville Shale), San Augustine Co., Survey: SINCLAIR, C, A-453
• Hatch GU SAG #1H, Chesapeake Operating: 13.281 MMcf/day IP, 22/64" choke, 7,278 psi; Perfs: 13,918-18,516, length: 4,598 ft.; Carthage Field (Haynesville Shale), San Augustine Co., Survey: PICARD, BB, A-493