?Interest in unconventional gas plays is unabated, as evidenced by more than 800 attendees—a new record—at this year’s Developing Unconventional Gas conference in Fort Worth, presented by Oil and Gas Investor and E&P in early April. Producers report that they’re spending a larger percentage of their—albeit reduced—capex budgets on their unconventional holdings and far less on their conventional leases.
One producer who has been focused wholly in conventional plays says he is seeking to build an unconventional portfolio instead. And, research analysts and investors are saying that, in this commodity-price environment, the best margin for $3.70 an Mcf is in unconventional—and gas, not oil.
Among them is Rehan Rashid, managing director and head of energy and natural resources research for FBR Capital Markets.
“If you aren’t getting $5 an Mcf, you should not be drilling any Gulf of Mexico (shelf) projects,” Rashid says of that particular conventional oil and gas play in the webinar “Where Are The $5 Gas Plays? Who’s Profitable In This Market?” presented in early April by OilandGasInvestor.com.
“Stick with the purest shale players and avoid producers in conventional plays, such as the Gulf shelf.” This is based on his expectation that demand for gas through 2012 will be, at best, flat with demand of 2008.
The highly capitalized drilling of the past few years has brought production overcapacity. Just as in the U.S. retail and residential sectors this past decade, there has been gas-production overbuild, and the economy is creating a strong headwind against improving gas prices, he says.
“Bankruptcies must happen; people must close shop, unfortunately.”
Helpful to producers that are struggling to make a margin in even the lowest-cost plays will be reduced service costs and operating costs, he adds.
At the current cost of oilfield services and at $4.50 gas prices (at the time of the webinar), the Haynesville, Marcellus, Fayetteville, Barnett and Woodford shale plays have single-well internal rates of return ranging from 25% to 75%.
If service costs decline 40%, the single-well IRR at $4.50 gas improves to 400% in the Haynesville; more than 300% in the Marcellus; more than 250% in the Fayetteville; more than 150% in the Barnett; and 100% in the Woodford.
“You need to find as much of a pure-play shale (producer) as possible (if investing in a gas producer),” he says.
Among producers he covers and others, shale-weighted players include Range Resources Corp. (primarily in the Marcellus and Barnett), Petrohawk Energy Corp. (Haynesville), Chesapeake Energy Corp. (Barnett, Haynesville, Fayetteville, Marcellus), Southwestern Energy Co. (Fayetteville) and Newfield Exploration Co. (Woodford).
Rocco Canonica, director of energy analysis at Bentek Energy LLC and a webinar co-presenter, agrees that there has been overbuilding. The gold-rush mentality in the U.S. gas industry these past few years led to 8% growth in gas production in 2008. “This happened to coincide with the worst financial crisis in decades. The result: Futures have dropped to less than $4 per million Btu from nearly $14.”
The current breakeven price is $2.88 in the Haynesville, he says; $3.16 in the Pinedale; $3.60 in the Fayetteville; $4.00 in the Marcellus; $4.02 in the Piceance; $4.04 in the Barnett; and $4.55 in the Woodford.
“Current spot prices are not supporting drilling in most unconventional plays,” he says. “But forward prices have not dropped below breakeven costs in some of the star plays.”
In early April, spot prices in the Rockies had fallen from $7.64 a year earlier to $3.05; Midcontinent, from $8.23 to $3.10; East Texas, from $8.25 to $3.75; Gulf Coast, from $8.57 to $4.59; and Ohio, from $8.93 to $4.88.
At press time in mid-April, the Nymex price for gas delivered this month at Henry Hub was $3.70. And more gas is coming online. Canonica says, “Gas-on-gas competition will become more intense.”
What’s economic at $2 gas prices? Rashid says costs have to come down some 70% to 80% to make $2 gas plays. The industry was profitable just a few years ago at $2 gas, he notes, and it can be again, but only if service and operating costs decline significantly.
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