Political risks are higher now than any other risks to the U.S. oil and gas business. Presidential candidates and current members of Congress need look no further than Alberta to see how imprudent government actions can slow down oil and gas drilling--and threaten production, Larry Nichols told more than 700 attendees at DUG: Developing Unconventional Gas, held in Fort Worth last week. The event was sponsored by Oil and Gas Investor and E&P magazines. The chairman and chief executive officer of Devon Energy Corp. (NYSE: DVN) warned about government interference in the industry and recounted how Devon became the largest player in the prolific Barnett shale. On the political front, Nichols cited several onerous bills pending in Congress that would remove tax breaks for the industry or introduce new taxes. In Alberta when this was done, E&P companies dramatically reduced their rig counts, had layoffs, and moved drilling activity to British Columbia and Saskatchewan instead. “We have serious challenges at the local level…but at the national level the challenges are even more serious. We’ve got to see that our country doesn’t make the same mistakes that Alberta has. Last year the premier introduced higher royalties and some companies saw their stock prices drop by half, and the rig count is way off. “Now the premier is saying, ‘Oh, I didn’t intend that.’ But these unintended consequences are just what the industry warned about." Closer to home, pundits talk of alternative fuels such as ethanol and wind and solar power, but oil and gas will still make up the majority of our energy sources, he said. In 2006, U.S. natural gas reserves rose 3% and in 2007, production rose 4.3%, according to the U.S. Energy Information Administration, Nichols said. “Some government leaders say we are played out and we have to go to alternative fuels. But the industry has over 8,000 wells in the Barnett shale and growing. Some 7% of the gas production in the U.S. comes out of that one field. Those are big numbers, and right out of the middle of the most-drilled state in the country.” Devon entered the play when it acquired Mitchell Energy & Development Corp. in 2002 “and Wall Street yawned,” Nichols said. Devon’s plan was to take CEO George Mitchell’s hydraulic fracturing techniques to the southwest of the main play area and to introduce horizontal drilling as well. In February 2003, Devon drilled its first horizontal well in Johnson County south of Fort Worth. By 2005 it had drilled more than 1,000 horizontals and produced a cumulative 1 trillion cubic feet of gas net to Devon’s interest. Later this year Devon will reach a production milestone of 1 billion cubic feet per day, net, from its Barnett shale holdings. “The best is really yet to come. We have at least another 3,000 net wells to drill and we are experimenting on 40-are spacing. This year we plan to experiment with 20-acre spacing. This is quite a unique reservoir.” --Leslie Haines, editor-in-chief, Oil and Gas Investor email@example.com
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