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Gas Shale to See Continued Upturn, Analysts Say

Unconventional gas resources have been expanding, with gas shale growing the fastest, up to 128 Tcf in 2006 from 52 Tcf a decade earlier, and that trend is likely to continue, an energy consultant said Wednesday.

"I think we can pretty well predict that by 2010 we're going to see close to half of our gas production supplied by gas shale-type gas and coalbed methane," said Don Warlick of Houston-based Warlick International in a webcast held in conjunction with Oil & Gas Journal. The gas shale industry is better managed than ever before and, if it can sidestep some economic and political pitfalls over the next few months, can expect better times as early as next year, Warlick said.

"We're stepping out on the edge in this business environment as it's been handed over to us by New York and Washington and I think we've got to be very careful...especially since we're going to have a new administration next year that could change to some extent the way that we drill and complete," he said. "It's going to be a strange time. I think by next spring, when we come out of the winter heating season -- we'll know how cold it was, we'll know the take on natural gas, how much, hopefully, we've reduced the oversupply of gas -- my notion is perhaps we'll be doing better by then."

The recent economic turmoil will have negative effects on all natural gas development, including shales, Warlick said, "but the interests to gas shale development all have this one mantra, 'look long term,' and we're thinking 30 years. This is not to say that the gas prices today are not important, not in the least, but we're looking at a buildout and a campaign that's a 20-, 25- or 30-year development to totally enhance and create a long-lasting asset."

Ongoing economic problems will put downward pressure on gas prices and will strain the exploration and production (E&P) sector's ability to secure credit and financing, Warlick said.

"They're all affected by the cost of money and access to money to fund these projects," he said. "Essentially most, if not all, overspent their cash flow in order to drill and get ahead...the ultimate result, of course, is we're going to have a number of rigs, if not laid down, sent some other place."

A natural gas oversupply has been building for months -- "we have a lot of gas available in storage in the pipeline" -- and the only thing that can bring down the supply would be a cold winter, Warlick said. Winter weather is beyond anyone's control and the outcome of the presidential election -- no matter who wins -- will have an inevitable effect on the industry, he said.

"This always happens, no matter who's president, and this is the case for all history, if there's a change in administration, there's going to be a change in regulation. Whoever is elected, they're going to put their stamp on energy has been a huge strategic focus in this last several months. I'm a little concerned about what is coming."

The good news is that gas shale opportunities are numerous and widespread; technology in gas shale drilling and completion "is hugely supportive," and the timing of the slowdown -- just before the winter heating season -- will help to reduce some inventory, Warlick said.

"If this was next April or May, this would be not good news," he said. "This is not going to save us, but it will certainly ease the landing."

Analysts at Barclays Capital this week also expressed confidence in shale's long-term prospects. While the market's exuberance regarding upcoming shale plays diminished substantially following the recent sharp drop in domestic gas prices, and despite a likely delay in the development timeline, unconventional gas, including shale plays, "represents the future for U.S. natural gas production," they said.

Some major shale operators have already announced budget cuts for 2009, including Quicksilver Resources (see NGI, Oct. 13), Chesapeake Energy Corp. (see NGI, Sept. 29), Petrohawk Energy Corp. (see NGI, Oct. 6), and SandRidge Energy.

"With gas prices at depressed levels, the development of several shale plays has been called into question," the Barclays Capital analysts said. "While we feel the exploration of the more nascent/unproven plays such as the Utica and Marcellus may slow or come to a halt, we feel the development of the higher confidence plays such as the Haynesville and the already established Barnett should continue, albeit perhaps at a less aggressive pace than was thought this spring/summer."

Despite the current glut of gas, the Barclays Capital analysts said "the Haynesville will be aggressively developed as high acreage premiums and short lease terms will likely encourage operators to aggressively exploit the play."

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