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IHS CERAWeek: Gas Price Pain? Blame Progress

Natural gas prices are going to stay low "for quite a while," and producers are just going to have to deal with it; after all, it's their fault, Southwestern Energy CEO Steven Mueller told a Houston audience Wednesday.

"Everything we do as an industry makes it more negative on the price side," he said. "...I think this is going to be a long-term battle; this isn't going to change overnight."

Two buck-something gas makes for a bitter pill considering it's the result of so much hard work and achievement in the energy patch. Drilling days are down, way down. Laterals are much longer. Finding and development costs have been beaten down while well costs have been holding about steady. Production and reserves, of course, are up, but so is demand as consumers notice the bargain.

It won't be enough for producers to just grin and bear it through the discount gas days. Those who tried that during the last gas bubble (circa 1986-1998) didn't make it, Mueller said at IHS CERAWeek 2012. "'Thriving' with low gas prices is the only successful strategy," he said.

Looking to the future, one can only expect energy technology advances to continue, and the spread of those advances will gather pace as what has been and will be learned in gas shales can quickly spread to oil, said Baker Hughes' Derek Mathieson, president of western hemisphere operations. What the industry winds up with is something of a hybrid of Moore's Law and Murphy's Law.

"The lessons we're learning are very quickly going to apply to new areas," Mathieson said. "No good deed goes unpunished. Technology led us to where we are today."

For instance, the industry is now in its fourth generation in the evolution of well completion technology. That's quite impressive when one realizes the first generation began in 2005. "The pace of change here is really something that's unprecedented," Mathieson said.

Back in 2005 the industry was using an average of four to five frack stages on a well with a maximum of eight. During the second generation of progress (beginning in 2009), the average number of frack stages was 12 with a maximum of 24. Last year the average was 20 stages with a maximum of 40.

"Almost everything that we're doing on the gas side can be translated to the oil side..." Mathieson said. "We don't have to wait five years to get to the same place."

Despite all the progress in well completion technology and practices, there's more to be done, particularly above ground, Mueller said. Southwestern has been looking to trucking and logistics giant J.B. Hunt and big box store Home Depot to learn more about moving large amounts of materiel and warehousing. "It's technology about how to get things from one point to another because they're [shale wells] such large-scale projects," he said.

As the pursuit of greater efficiencies continues, producers have been pulling back on dry gas drilling right and left and redeploying capital spending (capex) to oil and liquids-rich plays. QEP Resources Inc. is one of many.

"We have responded [to low gas prices] by drastically cutting the capex that we're dedicating to just dry gas drilling," said QEP CEO Charles Stanley. "We're focusing our capital toward oil and toward liquids-rich plays."

As this move continues across the industry, Stanley said it's still too soon to tell when the shift in drilling emphasis will balance the market.

The situation is so critical that it has moved Southwestern to start working the market end of the supply-demand equation and give away cars, natural gas-fueled cars. The company has embarked on a program aimed at putting about 10% of its employees behind the wheel of a natural gas vehicle, Mueller said.

A few compressed natural gas vehicles have been given away to employees; conversion kits are being made available to others. Ten percent is the goal because if just 10% of U.S. passenger vehicles were powered by natural gas, it would create an additional 4 Bcf/d of gas demand, Mueller said.

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