North American exploration and production (E&P) companies will continue to try to crack the code to unearth the "next" Barnett Shale natural gas play in North America, but even with a few "high potential candidates," it's unlikely to happen in 2008, energy analysts said.
In any case, it will be "technology, not geology," that will determine the success of any of the up-and-coming gas plays, said Jefferies & Co. Inc.'s Subash Chandra. The energy analyst, who covers the E&P sector, told NGI that the investment climate has changed, and the "Barnett effect," a belief that the next Barnett Shale "is just around the corner" is unlikely to come true in 2008.
What's changed? The money lenders, for one thing, and E&Ps will be "very selective" about development in the coming year, he said.
"There are a whole bunch of good plays, the Bakken [oil shale] in North Dakota, and we feel real strongly about the Devonian shales in the Appalachian Basin...As far as other resource plays, things like the Floyd Shale, the Lewis Shale...go down the list, the New Albany Shale, the Delaware Basin...These are not dead by any means. But they are not 2008 developments" (see NGI, June 12, 2007; June 4, 2007; Feb. 26, 2007).
Chandra said the "primary trends" that made exploration so alluring in 2006 and early 2007 -- rising profit margins as prices increased more than operating and finding costs, and "cheap" money, which allowed companies to spend "well above" cash flows for exploration -- have reversed. Now,
"Resource conversion trumps resource capture," said Chandra. "Put another way, the availability and cost of capital was not seen as a critical issue as long as a company could establish 'resource potential' based on a large acreage position, analogous discoveries or individual well results."
The availability of capital for E&P in the coming year "will depend on the pace at which proved reserves are recognized," the analyst said. "A continuous resource accelerates reserve bookings as offset locations are recognized for every location drilled. So repeatability is critical. A rising rig count accelerates the process."
Chandra said that "based on the wells we're watching, the information we have, there is not a whole heck of a lot of real, concrete results to hang our coat on" for strong resource development in the near-term. E&Ps know where the action is -- and where it's not, he said. "There are just not a lot of drilling challenges; there is a great heterogeneity in resources in one area to another. Some amount of capital is being sunk, but not a whole lot."
'Show Me the Money'
The costs to find and develop a play remain high, said Chandra, which puts pressure on the price of gas, which has been hovering at around $7/Mcf. "That's not enough. It's got to be at least $8 for some of these expensive plays. If everything worked out in drilling for gas in some of these plays, there would be not that much gas per section. If you put that much effort and money into something, the prize better be large."
A "combination of a lot of things," he said, leads to his belief that there won't be a lot of progress on developing gas plays in 2008. "I think there are just plays that we don't feel like they're making progress, that there is more risk rising than falling...We look at how much money we would need to make something successful. And money is not as easy as it was a year ago. You can't have wells that cost $5 million or $10 million. Producers ask themselves, 'what is the R&D [research and development] budget and what is that within the scope of what the company can spend.'"
What makes a successful play is technology. "That's what's made the Barnett," he said. "It's a technology play. When the limestone isn't there, when there are different organic compounds, they [producers] still make it work because of technology. That's really a question for these players. Where can technology gain the upper hand over geology?"
Chandra said the Barnett "just keeps getting better and better. All the other resource plays, they just pale in comparison. Barnett is doing 2 Bcf/d now; the Fayetteville is doing several hundred million...Something like the Barnett, nobody may be able to approach that for years" (see NGI, Dec. 3, 2007; June 11, 2007).
"Parts" of the Woodford Shale play are "getting there," said Chandra. "But [some] parts are bigger, some are smaller. The Woodford is landlocked. All of the players there know where the Woodford's going to work. They know the boundaries. For instance, Chesapeake [Energy Corp.] is getting rid of its fringe properties (see NGI, Nov. 26, 2007). They already know where the fringe is. After two years they already understand that this part ain't worth it. Parts of the Woodford are getting bigger, where they are extending laterals, adding rigs. But as a play, the aerial is getting smaller."
Energy analyst John White of Natixis Bleichroeder Inc. told NGI that one of the "real key considerations" to finding success in the gas shale plays will be the companies that "identify early on which shales are likely to work better than others. The best example of that is Southwestern Energy's dominance of the Fayetteville Shale. They got started on that before anybody even heard of it. They were way ahead of everybody else, and that early start allowed them to lock up a dominant position" (see NGI, Nov. 5, 2007; Aug. 20, 2007).
Southwestern certainly has its eye on building its Fayetteville production. In 2008, the Houston-based producer plans to invest more than $1 billion in its Fayetteville Shale, the second straight year its investment there will top the $1 billion mark. It plans to participate in 475 horizontal wells in the coming year, up from 400 in 2007. By the end of 2008, Southwestern is forecasting gross output to reach up to 450 MMcf/d, which would be a substantial gain from the 300 MMcf/d at the end of 2007.
Future Plays: Woodford, Maritimes, Marcellus
White said he wasn't sure what the "next big story will be," but he believes the Woodford play, which extends into the Ardmore Basin of southern Oklahoma, holds potential -- but no sure breakthrough in the coming year. "That could turn into another good play. But I haven't been able to get my hands on enough information. There's not a enough information out there to get a call on these types of plays. Most of them are in the early stages of development" (see NGI, Dec. 10, 2007).
Irene Haas, an energy analyst with Canaccord Adams, told NGI it will be a "tough year for start-ups" in 2008. But she maintained that "the next big shale could come from the Canadian Maritimes." Haas issued a report on the gas shale plays in New Brunswick and Nova Scotia a few months ago (see NGI, Oct. 8, 2007). She hasn't changed her mind, but they are unlikely to be a hot topic in 2008 as they are in the very early development stages.
"While we believe that it is possible to find multiple Tcf of gas in place in both basins, the plays are still in the incubation and exploration stage, and more wells are needed to prove these play concepts," Haas said.
Motley Fool's Toby Shute wrote in a note that believes there is "no shortage of contenders" for the next, great shale play. He thinks the Fayetteville Shale has yet to break out, but Shute, like Chandra, likes the Devonian shale possibilities.
"Like the Barnett, the Fayetteville is a Mississippian-aged shale, dating back more than three hundred million years," Shute said. "In order to get to what I believe is an even more promising geological formation, though, we need to turn the clock back just a bit further, to the Devonian era. In that period, a lot of algae died and fell to the bottom of a sea that covered what is now the eastern half of the country. Thanks to our fallen eukaryotic forebears, we have the opportunity to pump natural gas out of the resulting carbon-rich source rock. Illinois' New Albany shale, Michigan's Antrim shale and Appalachia's Marcellus shale all date from this period."
The Marcellus shale "is huge, stretching northeast from West Virginia, on up through a large swath of Pennsylvania, and into Western New York," Shute said, and it "appears to be a source of abundant, high-quality natural gas. The fact that it's just now being exploited may be a bit mystifying, especially since the resource has been known for ages. The main historical obstacle has been technological, and two major advances have made the Marcellus' development possible" (see NGI, Sept. 18, 2006).
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