The huge capital expenditures (capex) by the U.S. energy sector in 2008 are unlikely to be seen again "for many years," FBR Capital Markets analysts said Monday. Shale natural gas now is a priority, but total domestic spending has to fall through 2010 to balance the market, FBR analysts said.
FBR's Robert MacKenzie, Doug Garber and Christopher Breaux offered their bearish take in a report to clients. Exploration and production (E&P) operators have begun to direct more of their capex to gas shale projects and less to "nonshale" and U.S. Gulf of Mexico (GOM) shelf wells, and that is seen continuing through at least 2010.
The FBR team defined the U.S. land rig count using three categories: shale gas, conventional gas and oil.
"The conventional gas rig count should decline the most severely, dropping almost 60% in 2009 and another 30% in 2010," said the trio. "We expect the shale (Barnett, Fayetteville, Haynesville, Marcellus and Woodford) rig count to decrease by a third in 2009 and then increase 14% in 2010 and 20-30% in 2011 and 2012. The oil rig count should decrease by nearly 50% in 2009, then increase 13% in 2010 and 5% in both 2011 and 2012 when oil prices recover."
U.S. operators are seen spending "only 80% of their cash flow in 2009, 67% in 2010, and 80-85% long term, as projects are not economical at a long-term gas price of $4.50," wrote the trio. "In 2009, we assume $18.3 billion is spent on nonshale capex, at a weighted-average marginal finding and development cost of $2.70/Mcf (representing a 20% decrease from 2008 costs). Assuming a 20% decline curve results in 680 Tcf of gas produced in 2009, or an incremental 1.86 Bcf/d...based on our E&P team's other natural gas forecasts, this will lead to a surplus of 0.84 Bcf/d in 2009."
The lag in gas production declines and the weak economy will lead the 2009 U.S. natural gas market to be oversupplied even with a 62% cut to gas-directed capex, and that will lead to another 23% cut to gas-related capex in 2010, said the analysts.
"Nonshale capex will have to decrease another 37% to $11.6 billion" in 2010, said MacKenzie and his colleagues. "Assuming the weighted-average finding and development cost falls another 20% to $2.16/Mcf and the base decline rate is still 25%, then 534 Tcf will be produced in 2010, or an incremental 1.46 Bcf/d. This should balance the natural gas market."
Like recent forecasts by several other energy analysts, the FBR energy analysts think the U.S. gas rig count, already falling fast, will average 882 rigs in 2009 and 782 in 2010. FBR is forecasting that by 2011 the gas-weighted U.S. land rig count will begin to build once again to average 1,220 for the year and long term. However, capex spent to drill nonshale and GOM shelf wells will be "lower for longer."
The FBR team also thinks it's time to redefine shale gas wells because of their increased productive capacity. Fewer gas rigs will be needed to balance gas supply and demand over the next few years, said the FBR team.
"We expect overall capex in the U.S. to decrease by 50% in 2009 and by another 9% in 2010 to balance the natural gas market," said the analysts. "Total natural gas capex should decrease by 61% in 2009 and 27% in 2010. Conventional capex (nonshale and non-U.S. GOM shelf) is expected to decrease by 67% and 43% in 2009 and 2010, respectively. Deepwater capex should increase for the next two years as the overall rig count increases and then decreases in 2011 and 2012 as pricing declines."
Going forward, the FBR team is forecasting U.S. shale spending to continue to grow while the oil rig count remains roughly flat. U.S. deepwater capex also should be up, and "nonshale capex is the swing capex that is used to meet incremental demand or cut back on if there is an oversupplied situation."
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