El Paso Corp. Production Co. President Lisa Stewart said last week she has seen "no indication that we've got to shut-in production anywhere," despite lower natural gas prices. El Paso's $5.50/MMBtu "plan price" for natural gas provides "sustainability through the cycles," she told investors and analysts at the Wachovia Securities Equity Conference.
"We'll be able to drill through the hurdle and try to protect the downside," said Stewart. "A lot of our production volumes are already going to the physical side of our business, and we tend to be in a good position. We have no intention of shutting anything down."
Stewart's comments followed reports by several energy consultants in recent days who are forecasting that without hurricane-related shut-ins in the next few months, gas prices will fall because of a gas storage glut (see related stories).
But Stewart, who took over El Paso's ailing exploration and production arm in 2004 after several years at Apache Corp., disagreed. "What is the storage capacity in the industry?" she asked. "It seems to centralize on 3.5 to 3.6 Tcfe. In recent times, we have not been full. But a lot of salt dome storage has been added" in the past few years. "Where 'full' is, we really don't know. There is no clear answer."
Stewart said, "Where we are in production today is much different than where we were two years ago." She noted the company now has a "strong acreage position," and it has rebalanced its domestic portfolio to concentrate in the Texas onshore, the Rocky Mountains and in the Midcontinent.
So far, so good. El Paso increased its reserves 22% last year, with 94% replaced through the drill bit. The outlook now is 5-11% reserve growth and an 8-11% increase in production volumes this year. Onshore, El Paso is producing about 400 MMcf/d, with a "large inventory of opportunities" in coalbed methane plays in the Rockies, an emerging play in Indiana's gas shale region and revamped operations in South Texas.
"We still have a large hill to climb in E&P volumes," she said. "But onshore we are on plan with a steady increase from the drilling program, and growth averaging 5 to 7 MMcfe/d monthly." She noted the company had faced some "serious hurdles" when she took over that "needed to be addressed."
El Paso's capital philosophy at the time was focused on deep, high-risk wells. The capital was "heavily weighted" to higher risk Gulf of Mexico opportunities and in South Texas, where production was declining but costs were escalating. The organizational structure also was tilted, and it "didn't foster teamwork or communication," she said.
But one thing appeared to work. "Our underlying asset base was solid." She said the "one fundamental tying it all together we all believed was that with the right focus and the right set of people, we could make something happen." She said the production unit was reorganized with a regional focus, centered on capital discipline.
"Now we have a balanced portfolio between risk and reserve life, supplemented with acquisitions. All of our regions created value in 2005 and beyond at a $5.50/MMBtu gas price. The rebalance of the portfolio is evident when you look at the production volumes."
More than half of El Paso's production this year (53%) has come from its onshore U.S. regions. Its reserve life has increased from 6.1 years in 2004 to 9.5 years. And El Paso now has a drilling inventory with "at least five years of good opportunities."
Still, there are problems.
"Service costs have always lagged by about six months or so," said Stewart. She doesn't expect to see service costs go down even if gas prices fall because "costs for training people are going up. We have a real shortage on the technical and professional side and the field side. Everybody I talk to says the same thing. Employee costs are going to keep service costs at a higher level no matter what happens...a number of things that may or may not be directly related to gas prices."
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