Tuesday, January 31, 2012

Lots of New Texas Completions

1/17/12 - 1/31/12:

  • Bath Gas Unit B #10, Valence Operating: .584 MMcf/day IP, 30/64" choke, 290 psi; Perfs: 10,354-11,830, length: 1,476 ft.; Carthage Field (Haynesville Shale), Harrison Co., Survey: PAYNE, J, A-543
  • Mack V. Runnels #9, Valence Operating: 1.553 MMcf/day IP, 20/64" choke, 315 psi; Perfs: 10,410-11,990, length: 1,580 ft.; Carthage Field (Haynesville Shale), Harrison Co., Survey: MITCHUM, J, A-462
  • Hayes Unit #1H, EOG Resources: 2.402 MMcf/day IP, 10/64" choke, 9,054 psi; Perfs: 13,651-18,640, length: 4,989 ft.; Carthage Field (Haynesville Shale), Nacogdoches Co., Survey: RECTOR, GW, A-470

New Texas Permits

1/17/12 - 1/30/12:

  • CGU 10 #54HH , Anadarko E&P; Carthage Field (Haynesville Shale), Panola Co. Co., Survey: DUNCAN, S, A-158
  • Duke Rudman Gas Unit #M 1H  , XTO Energy; Carthage Field (Haynesville Shale), Panola Co. Co., Survey: WILLIAMS, E, A-736

Haynesville Shale Rig Count: -4 to 79

The Haynesville Shale rig count dropped another four rigs, leaving 79 working rigs in the play.  Louisiana was up one to 54, while Texas was down five to 25.

Monday, January 30, 2012

See Ya Later, Comstock

Add Comstock Resources to the growing list of companies cutting way back on natural gas and Haynesville Shale operations.  In a press release today, the company said that it has reevaluated its 2012 drilling plans to reduce the company's exposure to gas.  In 2011, Comstock reduced its Haynesville rig count from seven to two by sending two rigs to the Eagle Ford Shale and releasing three.  The remaining two rigs will drill a total of three wells in the first quarter of 2012 and then be shipped west Texas to drill for oil.

Comstock will spend $106.8 million in the Haynesville in 2012, $45.4 to drill 17 wells (5.1 net) (as noted above, only three will be Comstock operated) and $61.4 million to complete 20 (13.3 net) wells from its 2011 backlog.   Outside of participating in non-operated wells, I doubt we will see Comstock again until gas prices start to recover.

U.S. Rig Count Unchanged at 2,008

I was out of town at the end of last week and didn't have the chance to report that the U.S. rig count was unchanged at 2,008. While the total didn't change, oil rigs were up two to 1,225, gas rigs were down three to 777 and miscellaneous rigs were unchanged at six. By type, horizontal rigs were up two to 1,185, vertical rigs were down 13 to 606 and directional rigs were up 11 to 217.

Apollo Getting Closer to Buying El Paso?

The Wall Street Journal reported over the weekend that private equity company Apollo Global Management is leading a group that is at the front of the line negotiating to buy the E&P unit of El Paso from Kinder Morgan once it completes the acquisition of El Paso.  If this happens it is a rare case where another PE company beats KKR to a domestic energy deal!

The price tag would be around $7 billion and fund about a third of the $21.1 Kinder will pay for EP.  Kinder is considering a sale of the E&P unit as a single entity or breaking it up and selling the pieces.  Often the sum is greater than the whole - especially if a buyer is willing to pay a premium for a particular asset - but it is easier to sell the package as a single entity.  Stay tuned.

With Mitt Romney's history in the PE industry making front page news, PE is getting more attention, but I would argue that it is still not well understood.  I've worked in the industry for a number of years and the one thing I can tell you is that EP would be bought to be resold.  Period.  I'm not sure how that would impact operations at EP, but it means that a PE owner is not going to sit around twiddling its thumbs waiting for gas prices to rise.  It will work hard to "create value."  What that overused term means in this case is that they will make the company look as valuable as possible - in this case, build reserves, cut costs through efficiencies (good, bad or otherwise) and boost production.

But what it also means is that the company likely would be sold or IPO'd in the next three to five years.  Sometimes that means slapping a lot of lipstick on the proverbial pig, and sometimes that means making something out of nothing.  Which will it be?  Only time will tell.

Encana Cutting Back in Haynesville?

So, I hear that Encana is ceasing much of its operations in the Haynesville Shale by mid-February and keeping a couple of rigs working in the play for the rest of the year.  The company has not confirmed this, therefore it is officially classified as a rumor, so take it with a grain of salt.

In its latest investment presentation, Encana doesn't foreshadow any big moves in the Haynesville.  Instead it features the play fairly prominently in its presentation.  Of course, I'm just reading it and have not had the benefit of attending the actual presentation, so they might be saying it's a piece of you know what.  But later in the presentation, management touts that it is running 21 rigs in the play through the company's JV with Shell (SWEPI).

I'm not sure where the truth lies, but it seems that most of the E&Ps are coming out with cutbacks in dry gas activity, so it would not be a surprise.  Encana seems intensely focused on developing oil and NG liquids resources along with completing the Kitimat LNG facility in western Canada, so I wouldn't blame them for heading towards the sidelines in the Haynesville to sit things out for a little while.

Thursday, January 26, 2012

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.

Wednesday, January 25, 2012

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

Monday, January 23, 2012

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.

Sunday, January 22, 2012

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.

Friday, January 20, 2012


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

Thursday, January 19, 2012

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.

Tuesday, January 17, 2012

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

Monday, January 16, 2012

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.

Friday, January 13, 2012

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.

Thursday, January 12, 2012

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.

Wednesday, January 11, 2012

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.

Tuesday, January 10, 2012

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

Monday, January 9, 2012

A Shale Acreage Valuation Bubble? Really?

I just perused a Bloomberg article, "Shale Bubble Inflates on Near-Record Prices," inspired by Japanese commodity trader Marubeni Corp.'s joint venture with Hunt Oil in the Eagle Ford Shale that valued the land at $25,000 per acre.  It all sounds pretty scary.  Here's the intro:
"Surging prices for oil and gas shales, in at least one case rising 10-fold in five weeks, are raising concern of a bubble as valuations of drilling acreage approach the peak set before the collapse of Lehman Brothers Holdings Inc."
The only thing missing from the sentence was "Enron" or "dot.bomb!"  These days, everyone is looking for the next big bubble since they seem to be popping around three per decade.  At that pace, the next one should be due in a year or two.

While there may be a bubble in shale drilling, I think it has more to do with natural gas over-production than the valuation of oil and gas shales.  And I'm definitely less worried about foreign companies paying U.S. producers too much money for acreage and shale expertise.  Actually, foreigners overpaying for acreage sounds more like an economic development plan (leading to jobs!!!) than a bubble popping.

True, foreign joint ventures accelerate drilling, which leads to over-production, but the article is more panicked about valuations.  But as far as I'm concerned, the big foreign players can keep tripping over themselves to pour billions of dollars into U.S. businesses.

Haynesville Shale Rig Count: -3 to 88

The Haynesville Shale rig count dropped by three last week, bringing the number of working rigs to 88.  The count was down one in Louisiana to 58 and down two in Texas to 30.

Sunday, January 8, 2012

Oversupply and the Austerity Argument

I'm finally losing faith in the idea that high natural gas supply and continued low prices will create some sort of fiscal austerity that will cause producers to lay down rigs en masse.  Cold winters for the past two years artificially lowered supply to give the producers a break, but all that did was give them breathing room to count their blessings without breaking stride.

This winter, if you give the producers a break (a brutal cold snap that craters supply levels), it's pretty clear that they will treat it as an excuse for business as usual.  But if there is no such break this year and we have a warm winter, what happens?  I would argue that their behavior will not change dramatically.

It feels like the question I ask myself when I pull up to an intersection with a panhandler and a well-worn sign asking for help.  I want to help the guy, but if I give him money is he going to buy food or blow it on some hooch.  (Or, worse yet, is panhandling more profitable than working?  But that's another story.)

Friday, January 6, 2012

Ugly Start for Gas Prices

This new year started with a thud for natural gas prices, as the red line on the chart below illustrates.  Considerably worse than past (unimpressive) years.

Given the market conditions and the current high level of storage, don't look for the January spike in prices we've seen in past years.  I hate to say it, but gas fans need to pray for a new (albeit temporary) Ice Age.  Or at least a few big, well placed cold snaps.

U.S. Rig Count: Unchanged at 2,007

The weekly Baker Hughes rig count held at 2,007 for the week.  Oil rigs were down two to 1,191, gas rigs were up two to 811 and miscellaneous rigs were unchanged at five.  By type, horizontal rigs were down seven to 1,160, vertical rigs were up six to 631 and directional rigs were up one to 216.

EIA 2010 Natural Gas Annual

Last week, the EIA released its 2010 EIA Natural Gas Annual report.  It's a compendium of facts and figures related to the natural gas industry presented in a blizzard of numbers.  While I like numbers, I'm really more of a visual person, so a picture really is worth a thousand words (or numbers) for me.  In reviewing the report, there are two figures that tell the current story of natural gas to me.

The first is a visual representation of the flow of gas quantities, from production and imports to processing, storage and end users.  It's a great overview of the industry.  Focusing on end users, it shows that electrical production and industrial customers make up 58% of all gas consumed in the U.S. Both are very especially sensitive to the economy and will remain key demand drivers for gas, especially as coal-fired power plants are eliminated.  But the illustration also shows huge growth opportunities in exports and vehicle fuel.

The second graphic answers the question, "if prices are so low, why are they still producing more gas?"  Well, in 2010, the number of wells decreased by 1%, but the total production increased by about 3.5%.  Fewer wells making more gas.  Expect that trend to continue.

Thursday, January 5, 2012

Dealin' Devon

Earlier this week, Devon Energy announced a big joint venture deal with China Petrochemical Corp. (a.k.a. Sinopec) covering five emerging U.S. basins.  Sinopec will pay Devon $2.5 billion for a one-third share of Devon's 1.2 million acres in the Tuscaloosa Marine Shale (LA-MS), Niobrara (WY), Mississippian (OK), Ohio Utica Shale (OH) and the Michigan Basin (MI). Sinopec will pay $900 million cash upfront and $1.6 billion of carried drilling costs over the next several years.

Devon's deal is yet another example of a multi-national energy giant kneeling at the altar of shale gas in the U.S.  Last week, Total and Chesapeake signed their JV deal for the Utica Shale and last month SandRidge Energy and Spain's Repsol YPF agreed on a $1 billion JV for SandRidge's acreage in the Mississippian play.

One big difference with Devon's deal is that the EIA estimates that China has the largest technically recoverable shale gas reserves in the world.  The Chinese are here to learn so they can exploit their own resources.  China's CNOOC already made a shale deal with Chesapeake last year.  This is a double-edged sword for U.S. shale. On one hand, China represents one of the largest export markets for natural gas (and it sure would be nice to see them burn less coal!) but at the same time it hopes to leverage U.S. expertise to produce its own gas to supply much of its demand in the long-term.

EIA Storage Report: "Houston, We Have a Problem"

The EIA working gas in storage report showed yet another disappointing net withdrawal this week.  The storage level only dropped 76 Bcf to 3.472 Tcf.  The weekly withdrawal was 44% below last year (-135 Bcf) and 28% below the five year average (-106 Bcf).  As a result, the current storage level is 11.4% (+356 Bcf) higher than last year and 15.2% (458 Bcf) above the five year average.

This is a serious problem for natural gas.

I don't necessarily expect gas prices to plummet in the very short term, as utilities will be snapping up cheap gas to use instead of coal, but with the current level so high, it will be very difficult to pare it back before the injection season begins again in a few months.

So, not only is natural gas facing an uphill climb against a slow economy, now it has to contend with a warm winter (so far).  In the past couple of years, gas benefited from a cold winter, or at least a few weeks of brutal cold, but so far this year it's been pretty mild, as the temperature differential map below shows.  Last week's temperatures were 4.9 degrees warmer than the 30 year average and 6.0 degrees warmer than last year.  Heating degree days were 15.3% below normal.

Wednesday, January 4, 2012

Goodrich 2012 Capital Budget

Goodrich Petroleum announced its 2012 capital expenditure budget today with a total expected spend of $250 to $275 million.  Unfortunately for gas fans, the vast majority of it will be spent chasing oil.  Sound familiar?  In the Haynesville Shale, $25 million will be spent to drill two wells in the Angelina River Trend area of Texas, and $35 million will be spent completing 14 (6 net) previously drilled non-operated wells.  The rest of the budget will be spent int he Eagle Ford Shale ($155 million) and the Tuscaloosa Marine Shale ($20-$45 million), with the remaining $15 million spent on leasehold and infrastructure.

Goodrich's total capex budget is $25-$50 million higher than last year, but the Haynesville portion is two-thirds of its $90 million 2011 capex budget.

Chesapeake and Total Close JV in Utica Shale

Yesterday, Chesapeake Energy announced that it had closed a deal with French company Total S.A. in a joint venture in the Utica Shale.  The preliminary terms of the deal were announced back in November, but the partner's name was not disclosed at the time.

The deal is like others Chesapeake has struck with the one wrinkle that CHK earlier had partnered with investor EnerVest, Ltd. on the acreage.  The Total deal was valued at $2.32 billion, with $2.03 billion going to CHK and $232 million to EnerVest.  CHK received a $610 million payment at closing and Total will fund $1.42 billion of future drilling costs.  Total received a 25% interest in the 610,000 net acres owned by Chesapeake (542,000 acres) and EnerVest (77,000 acres).

The only question is why it took so long for the loquacious Chesapeake to announce its partner and the actual closing (Dec. 30 closing, Jan. 3 announcement).  Is CHK getting shy or did EnerVest or Total put a lid on them?

Monday, January 2, 2012

The Unthinkable in Iowa

On the eve of the Republican caucuses in Iowa, the unthinkable happened.  No, a rational political process for electing a president did not suddenly emerge.  But another sacred cow bit the dust:  the 30 year old federal tax credit for ethanol was not renewed by Congress in 2011 and it expired with the beginning of the new year.  What makes this particularly unthinkable is that it happened in the midst of the Quadrennial Feast of Iowa (a.k.a. the Iowa caucuses), during which politicians normally kneel at the altar of all things corn.

The difference this year is that corn is having a pretty good run and government subsidies are suddenly very unpopular.  The ethanol subsidy made especially little sense.  For 30 years, the federal government has offered a tax credit to turn food into fuel.  It cost us $6 billion in 2011.  But the feds also charge a tariff on foreign ethanol and mandate the use of ethanol in vehicle fuel.  The tax credit was the cherry on top of a pretty sweet deal.

The ethanol industry didn't fight too hard to keep the tax credits, which means that they have their eyes on a bigger prize, namely funding for fuel retailers to upgrade infrastructure to handle higher levels of ethanol, thus having the federal government subsidize the consumption of more ethanol.  The corn industry doesn't think corn or ethanol production will be harmed by the loss of the subsidy, which makes me wish it had been taken off the table long ago.  As long as mandates continue to exist, they are probably right.