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EnCana Shuts in Gas Wells on Low Prices

Because of low natural gas prices EnCana Corp. has shut in some wells in both the United States and Canada that produce "a couple of hundred million cubic feet a day," CEO Randy Eresman said last week.

Eresman, who was speaking at the 20th annual Canadian Association of Petroleum Producers Oil & Gas Investment Symposium, said he could not give specific figures or the location of the gas wells that have been or will be shut in, but shut-ins could be as high as 400 MMcf/d across North America.

"When they're economic, when they make money again" the shut-in wells will be returned to production, said Eresman. "In some cases, we're getting below the lifting costs...You more or less have to shut them down."

EnCana produced on average 3.87 Bcf/d in 1Q2009.

The producer is forecasting gas prices to "range between $4.50 and $8.50/MMBtu, but that will shift up or down based on a number of market conditions," said Eresman. The Calgary-based producer can't control commodity prices, he said, and "we need to be able to control what we can, and that's costs." EnCana's service costs have fallen by around 20% since the start of the year, he said, but it also is focusing on projects that are less expensive to develop.

"Attractive returns are still possible based on 2009 costs," Eresman said. EnCana has designed its capital budget based on a "long-term price at $4/MMBtu Nymex [New York Mercantile Exchange]..."

Unconventional gas and oil "resources are the future of our company, and it's become increasingly clear, they are the future of the North American energy industry as well," he said. "We recognized several years ago that conventional production in North America was on an unstoppable decline...and so we have continued to acquire positions in unconventional resources, oil and gas."

Today EnCana controls 23 million net acres onshore in North America. Total proved reserves are estimated at 19.7 Tcfe.

Three Canadian gas plays continue to hold the company's interest: the Horn River Basin and the Montney play, both in British Columbia; and in the Mannville coalbed methane play in Alberta. EnCana also has developments under way in several U.S. gas basins, including the Piceance Niobrara, Delaware Barnett, Haynesville Shale and the Maverick Pearsall play.

Spending has not diminished in the race to secure leaseholds in emerging gas plays, including the Haynesville Shale, where EnCana has "moved incrementally to capture as much land as possible." The company now controls around 435,000 net acres in the play.

"EnCana is capable of generating significant growth, but now is not the time to do that," Eresman said.

Last week EnCana said it had locked in fixed-price hedges on about 35% of its projected output -- 1.39 Bcf/d -- at an average price of $6.21/Mcf for the 2010 natural gas year, which runs from Nov. 1 to Oct. 31, 2010.

"Our gas price hedging program has served us well in the first five months of 2009, generating close to $2 billion in cash flow above what market prices would have delivered," said Eresman. "This strong cash flow has underpinned our 2009 capital investment during the global economic downturn."

The hedging program "increases certainty in cash flow and helps ensure that we meet our capital investment and dividend requirements," he said. "It also brings greater certainty to the economics of our projects. At an average price of $6/Mcf, EnCana expects to earn an after-tax rate of return on gas projects in excess of 20%."

North American gas markets, noted the CEO, "remain oversupplied due to two factors, the emergence of large new supplies from unconventional plays, followed by a major economic downturn in the past year that has cut demand. These events have driven prices to levels well below what it costs to add new supplies -- levels that we believe are unsustainable.

"In recent months, drilling has slowed and over time we expect that production will decline, bringing the market back into balance. However, it is difficult to predict when that will occur and what price will emerge."

About two-thirds of the Calgary-based producer's current gas output, or about 2.6 Bcf/d, is locked in through October at an average New York Mercantile Exchange-equivalent price of $9.13/Mcf.

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