Monday, March 16, 2009

Is the "Great American Drilling Boom" Over?

The New York Times reported in a front page article in the widely read Sunday edition that, "The great American drilling boom is over." The article mostly focused on the price of oil and gas (mostly gas) and the impact on the Barnett Shale. The timing of the article coincided with the reduction of the U.S. rig count from 2,400 in summer 2008 to 1,200, a 50% decrease.

There was nothing particularly revealing in the article, but it does provide a good summary of what has been going on in the gas market. The article reiterates that it is a natural gas oversupply that is causing the sharp decrease in price. It makes the point that as rigs and crews are idled, the over-supply issue will turn into an under-supply issue and the time it will take to re-start the drilling will lag to the extent that the U.S. might have to import LNG from countries like Qatar to make up the difference. As absurd as it sounds (importing a resource that is abundant in our country), it makes sense that a tanker of liquified gas can arrive in the U.S. from the Persian Gulf a lot faster than a bunch of rigs can start drilling again.

What also drew my attention was the prominence of the article. Front page, above the fold in one of the most widely read periodicals in the country.

Also interesting was the chart that showed historical natural gas prices above another chart showing oil and gas rigs in operation (both reproduced below). The steep falloff in the number of rigs is rather unbelievable. But the charts show, although the article really doesn't mention, that the number of rigs being utilized this past summer was the highest ever, by far. There really was an overabundance of rigs out there. The previous peak was around 1,600 in 2001. In other words, there was a lot of room to fall. It's all a continuation of a boom/bust cycle that has characterized the oil and gas industry since its inception.

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