The domestic natural gas rig count is down substantially from year-ago levels, but higher initial production (IP) rates in some of the prolific shale plays suggest rig efficiencies may have lifted output by 10%, which would partially offset expected supply declines, a review by Barclays Capital analysts has found.
The note by Barclays analysts Jim Crandell, Biliana Pehlivanova and Michael Zenker preceded the Potential Gas Committee's report on Thursday, which said domestic gas reserves have grown almost 60% in the past four years because of new technology and prolific gas shale plays (see related story).
"The deep cuts in the rig count are contrasted by steady activity in some of the more prolific gas plays: the Haynesville, Woodford, and Marcellus shales," wrote the trio. "This focus of remaining drilling activity on higher IP plays suggests that the amount of gas added per rig-month is likely growing.
"Producers also continue to reduce drilling times," and combined with the rig efficiencies, the effects "are likely offsetting some of the supply decline that will result from the drilling cuts."
If rig efficiencies have improved by 10% it would have a "meaningful effect on supply, with 2009 ending the year 0.6 Bcf/d higher than it would with no gains in efficiency, while gas production by the end of 2010 would be 1.9 Bcf/d higher in our outlook," wrote the Barclays trio. "A 25% jump in rig productivity would boost end-of-2010 production by a whopping 5.7 Bcf/d compared with our baseline view."
The shift to unconventional drilling, especially in the shale plays, has been under way for a decade, but the Barclays team looked at what has happened since producers dropped rigs in less productive plays late last year but kept up drilling in the higher IP plays.
The drilling pullback has been highest in the lower IP plays, but there's something else at play, the analysts noted: "producers have made great strides in slashing drilling times, allowing gas additions per rig to grow simply by drilling more wells per year, per rig."
With a 10% hike in rig efficiency and all other factors equal, the Barclays analysts estimated that total U.S. gas output could jump about 600 MMcf/d.
"By the end of 2010, U.S. production would surge a full 1.9 Bcf/d. This would result in an additional 165 Bcf of gas in storage by the end of this October -- meaningful, but not game changing."
But the Barclays analysts think the 10% gains already have been achieved across the board. "We are adopting this as our new base outlook for supply."
And a 25% jump in rig efficiencies is possible, they noted. If and when that occurs, "the results would be dramatic. By year-end 2009, U.S supply would grow an additional 2.2 Bcf/d, and it would be an even more supple 5.7 Bcf/d higher by the end of 2010. This highlights the effect that rig efficiency, a wildcard factor with high variability and low predictability, can have on supply/demand balances, especially by 2010."
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