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Gas Drilling Uptick 'Worrisome,' Says Barclays

The U.S. natural gas rig count is showing a much faster-than-expected recovery, which is worrisome and could result in more supply than needed in 2010, Barclays Capital analysts said last week.

"While one could conclude...that producers did not cut drilling far enough or long enough, the recovery of drilling will be equally important, and demand is simply not cooperating in helping to tighten the markets," wrote Barclays' James Crandell, Biliana Pehlivanova and Michael Zenker. "A fast recovery in drilling would oversupply the markets, and necessitate a correction in the forward curve in order to send the appropriate signal back to the market."

Encouraging forward prices and more accommodating capital markets have spurred a jump in gas-directed drilling over the past two months, the trio noted.

"This has led to a wave of optimism in the natural gas market as the injection season nears its end. While storage facilities are full to the brim and operational flow orders abound, constraints so far have been localized, and the system has been able to reshuffle and accommodate the excess gas. Producers are looking ahead and are ready to drill."

However, even though producers drastically reduced their rig counts in late 2008 and into the summer, "the declines in production have fallen short of expectations," noted Crandell and his colleagues.

Referring to the latest month-over-month (m/m) Energy Information Administration data (see NGI, Oct. 12), the analysts noted that most of the reduction in gas output "came from a drop in Wyoming production, the magnitude of which surprises against the backdrop of the state's historical trends. Had Wyoming production followed trend line declines, Lower 48 output would have fallen by less than 0.1 Bcf/d m/m. Given the steep drop in the U.S. rig count, we had anticipated declines to be running at more than 0.3 Bcf/d m/m by this time."

With producers once again ramping up gas drilling, the Barclays team revised its production estimates higher for 2010.

"At the beginning of this year we had anticipated that the rig count would bottom mid-year and remain in the 650-700 range through the end of 2009, recovering to 1,300 by the end of 2010. Our current balances assume that the rig count recovers steadily from current levels, rising to 900 by the end of 2010."

According to Baker Hughes Inc.'s survey, the gas rig count bottomed in mid-July. The Smith Stats survey set the minimum gas rig count at 672 at about the same time. "Importantly, both surveys show that a recovery in drilling is now under way," wrote the Barclays analysts.

The most prolific shales with the best economics are leading the rig count recovery, noted the trio. Drilling in the Haynesville Shale "has been hardly affected by the price slump, rising steadily since June...The [Haynesville] rig count bottomed in February at 74, and has since grown to 102" for the week ending Oct. 9. "The core counties in Louisiana have attracted the most rigs, but drilling is also on a rebound in the Texas portion of the Haynesville formation where initial production rates are lower than in Louisiana but economics are nevertheless superior to much of the rest of the U.S."

However, drilling has picked up in most of the country's big shale plays over the past month, the analysts noted. According to their calculations, "Haynesville drilling grew 10 rigs, but moreover, Fayetteville added eight, Woodford three, and Marcellus four rigs over that timeframe. Drilling in the Barnett, in contrast, has remained flat...Of the 26 rigs that have been added to the U.S. gas-directed rig count in the past four weeks, 23 came from the top five shales."

Gas producers continue to prefer horizontal and directional wells to vertical wells, noted the Barclays analysts. "While horizontal drilling was cut by 40% from peak to trough, vertical rig counts dropped by 75%. Similarly, as the rig count has rebounded, horizontal drilling has gained 65 rigs, while vertical rig counts have added only seven."

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