The first quarter of this year saw a drop in gas prices of about 30%, resulting in a shift in strategy for oil and gas companies who had been betting on an increase in the price of gas. At the beginning of the year, it seemed we were looking at prices of $6 to $7 per MMBtu. Unexpectedly, supply is high, and today the price closer to $4.
The drop in gas prices will make the economics of many current gas projects, including shale gas, marginal in terms of profitability. The situation is amplified by slow demand through the recession, well-stocked storage space and increasing international LNG capacity, so there is no quick respite in sight.
Meanwhile, the price of oil has grown to more than $80 a barrel. As a result, we are seeing an increased focus on oil and more investment in areas with oil potential (like EOG Resources’ recent announcement that it will develop 500,000 acres in oil-producing areas).
Companies with a strong focus on gas and gas shale will need to find ways to maintain cash flow through cost reduction, streamlined operations, and other ways to free cash. In addition to low prices for gas sold, the current business case to their investors is based on an estimated production for the relatively few wells drilled and some extrapolation. This means they are highly leveraged and need to ensure a strong cash flow to maintain the development pace to achieve a positive return to investors in promised time frame.
To address this, we should expect to see companies with large exposure to onshore gas like Cheasapeake Energy Corp., Petrohawk Energy Corp. and Cabot Oil & Gas Corp. sell assets to maintain operations and a renewed focus on cost-control and cash-release initiatives as well as shift focus to liquids production as much as possible. In fact, we have already seen that Petrohawk recently sold some assets, and Anadarko Petroleum Corp. recently made a deal with a Mitsui Oil & Gas Exploration company in Japan.
--Jan Erik Johansson
About the Author: Jan Erik Johansson is vice president, energy sector, for Celerant Consulting Inc. He can be reached at firstname.lastname@example.org.