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Horizontal Rig Count Declines at Faster Pace

The U.S. natural gas rig count is falling, as expected, but the horizontal drilling rig count has begun to markedly decline, with the last week of December reporting the largest single-week loss for the shale-directed rigs since 1991.

The number of rigs actively exploring for oil and natural gas in the United States dropped by 98 to 1,623 on Friday, according to Houston-based Baker Hughes Inc. Of the rigs running nationwide, 1,267 were exploring for natural gas and 346 for oil; 10 were listed as miscellaneous. Baker Hughes for the week ending two weeks ago on Dec. 26 indicated that the U.S. gas rig count stood at 1,347 rigs, which was 105 less gas rigs in operation than for the week ending Dec. 28, 2007. Most of the gas rigs lost have been in Texas.

A year ago the U.S. oil and gas rig count stood at 1,774. According to Baker Hughes, last week Texas lost 54 rigs, North Dakota lost seven, and Wyoming, New Mexico and Colorado lost five each. Arkansas lost three rigs, and California lost one. Louisiana picked up four and Alaska added one. Oklahoma's rig count was unchanged.

The gas rig count drop at the end of December "revealed a shift toward a greater cut in horizontal drilling," said Barclays Capital analysts. "Importantly, most of the decline occurred in Texas, especially District 5, which comprises the south side of the Barnett Shale region." The rig count in District 5 fell to 152 from 163 for the week ending Dec. 19. Until the Dec. 19 Baker Hughes rig report, "most drilling cuts had been concentrated in vertical drilling."

Analysts with SunTrust Robinson Humphrey/the Gerdes Group (STRH) noted that the gas rig count between mid-November and the week ending Dec. 19 "shed an aggregate 145 rigs and is nearly 350 rigs below its early September high."

Stephen Smith Energy Associates Inc., which compared the rig rate for Texas gas shale/North Dakota oil/gas regions, noted that until the last few weeks, "growth has been steady and strong since 2004" across both areas, "but the first response to sharply lower oil/gas prices is now visible even for this high-growth regional grouping" (see related story).

Gas prices "peaked in early July 2008 and the national rig count total peaked about 10 weeks later at 2,018 rigs in mid-September...We believe that the rig count will decline to at least 1,300-1,400 rig range before the North American gas market re-establishes supply/demand balance," the Smith analysts said.

Between mid-November and Dec. 19, "the gas rig count has shed an aggregate 145 rigs and is nearly 250 rigs below its early September high," STRH analysts noted. "Our expectation of a 1,000 average gas rig count in '09 (sub-900 rigs by 2Q2009) suggests onshore natural gas production should decline 0.9 Bcf/d next year. Notably, our forecast assumes a further 20% improvement in well/rig productivity largely attributable to a greater percentage of production from highly productive shale resource plays."

Meanwhile, the Railroad Commission of Texas (RRC) reported that through November, total reported gas production in the state was 7.1 Tcf. Texas natural gas production for November totaled 348,323,196 Mcf, down from 398,834,979 Mcf reported in November 2007.

"Ninety-six percent of the wells in Texas are drilled by independents," said Texas Alliance of Energy Producers President Alex Mills. "Independents react quickly to market conditions. When prices were going up, they couldn't get their hands on enough rigs. When prices went down, most of the industry started taking a wait-and-see attitude."

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