Gulf of Mexico shelf gas producers are at the greatest risk of not staying afloat of current natural gas prices. “If you aren’t getting $5 an Mcf, you should not be drilling any Gulf of Mexico (shelf) projects,” says Rehan Rashid, managing director and head of energy and natural resources research for FBR Capital Markets, a unit of Friedman, Billings, Ramsey & Co. Inc.
“Stick with the purest shale players and avoid producers in conventional plays, such as the Gulf shelf,” he says.
Rashid and Rocco Canonica, director of energy analysis at Bentek Energy LLC, present their analysis of current gas-price economics in the webinar “Where Are The $5 Gas Plays? Who’s Profitable In This Market?” The webinar archive, including the speakers’ slides, is available at https://www.oilandgasinvestor.com/webinar/200904_gasplays.
Rashid expects demand for gas in 2012 to, at best, be flat with demand of 2008.
With the highly capitalized drilling of the past few years has come production overcapacity. Just as in the 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.
“Bankruptcies must happen; people must close shop, unfortunately,” he says.
If service costs and operating costs improve, positive margins will return in some plays and improve in others. “You need to find as much of a pure-play shale (producer) as possible (if investing in a gas producer).”
Among producers he covers and others, shale-weighted players include Range Resources Corp. (primarily in the Marcellus, Barnett), Petrohawk Energy Corp. (Haynesville), Chesapeake Energy Corp. (Barnett, Haynesville, Fayetteville, Marcellus), Southwestern Energy Co. (Fayetteville) and Newfield Exploration Co. (Woodford).
What about forecasts for LNG dumping into U.S. terminals and storage facilities this summer? Canonica says the economics are not favorable for LNG coming into the U.S. right now. “The end is full here.” The incentive for LNG dumping is not present, especially on the U.S. Gulf Coast, compared with terminals on the Atlantic Coast. “If there is dumping, it would be on the East Coast,” he says.
Rashid agrees, and adds that there may be dumping, nevertheless. For an owner of a tanker of LNG, “I’ve got to dump it somewhere.”
Which shales plays have stronger odds if service costs decline? At the current cost of oilfield services and at $4.50 gas prices, the Haynesville, Marcellus, Fayetteville, Barnett and Woodford shale plays have single-well internal rates of return ranging from 25% to 75%, according to Rashid.
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.
Canonica says 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; $3.16, Pinedale; $3.60, Fayetteville; $4.00, Marcellus; $4.02, Piceance; $4.04, Barnett; and $4.55, Woodford.
“Current spot prices are not supporting drilling in most unconventional plays. But forward prices have not dropped below breakeven costs in some of the star plays,” Canonica says.
Spot prices in the Rockies have fallen from $7.64 a year ago 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.
Canonica offers a comparison of Haynesville and Piceance production forecasts through 2018 in the current economic environment. “While production in the Piceance is projected to decline slightly and then flatten out, Haynesville drilling economics and producer drilling plans indicate rapid growth.”
That new Haynesville production—as much as 4 billion cubic feet a day by next year—will create hurdles for producers in the Gulf Coast region to get their gas into sales.
“Southeast/Gulf outbound pipe flows reached capacity briefly this winter and is projected to be solidly against the capacity line late this year as the Haynesville continues growing. 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, and it can be again, but only if service and operating costs decline significantly, he says.
The “Where Are The $5 Gas Plays? Who’s Profitable In This Market?” webinar archive, including the speakers’ slides, is available at https://www.oilandgasinvestor.com/webinar/200904_gasplays.
–Nissa Darbonne (email@example.com), Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com, UGcenter.com.
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