Cost inflation and/or gas-price declines are major threats to the profit margins of companies pursuing resource plays. A new study by Simmons & Co. International has determined that the benchmark price for natural gas should be $6.60 per thousand cubic feet (Mcf) to sustain profitable E&P development in all areas of current activity, but especially in unconventional plays such as coalbed methane (CBM), tight-gas sands and shale gas. The most cost-intensive resource plays include those in the Piceance and Uinta basins, Woodford shale, Wyodak CBM in Wyoming, and Arkansas' Fayetteville shale, analysts with the Houston-based investment-banking firm report. "We would expect these basins to be the first to witness any meaningful slowdown in drilling activity (in the event of) a material decline in natural gas prices." Profit margins in unconventional plays improve on a higher relative percentage basis when gas prices go up, compared with conventional plays. Unconventional plays typically require several fracture jobs per well, increasing expenses, all other things being equal. Conventional production economics are more attractive, the study notes, but conventional plays often have less reserve-growth opportunity than do unconventional plays. "Assuming a $7-per-Mcf gas price, there is not much room for additional service-cost increases in some unconventional-resource plays before there is a reduction in demand for services [e.g. drilling]," the analysts report. If gas were to remain at $6.50 per Mcf, then the Wyodak and Piceance plays will be uneconomic for new entrants, which typically pay more to acquire acreage. "Assuming a 10% service-cost inflation in 2006, this list expands to include the Uinta, Fayetteville and Woodford plays," the analysts report.
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