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Outlook Dim and Dimmer for Gas Drilling

August 6, 2012
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As one oil and natural gas producer after another highlighted a swing away from drilling for natural gas in second quarter earnings conference calls, the number of operating rigs targeting natural gas fell again last week, dropping seven rigs from the previous week and marking a decline of 44% from the 883 gas-directed rigs operating a year ago, according to the Baker Hughes rig count.

And there were no hints of a turnaround. Apache Corp., which boasts of being the second most active operator out of all the independents and majors, currently has 62 rigs running, and "not a single one of the 62 rigs is drilling a gas target," CEO Steven Farris said in the company's second quarter earnings conference call last week.

Pressed by an analyst as to what gas prices would have to be to get him back in the gas patch, Farris said it wasn't that simple. "No. 1, I think gas in this country -- most gas wells are going to be challenged and the reason is if you see prices increase, there are so many locations that people can drill gas wells. But what you're going to see is an influx of rigs and people drilling gas wells, and you're going to have -- you're going to run into the same [oversupply] problem."

And since operators have discovered that horizontal drilling and fracking works just as well with oil as it does with natural gas, the natural gas price would have to increase materially to overcome the 30-to-1 price differential with oil. "It doesn't take rocket scientist to figure out you'll drill an oil well if you got the opportunity," Farris said.

EOG CEO Mark Papa had a similar refrain. Pappa said the company's dry natural gas program is essentially idled until more favorable economics return. "Due to the ongoing weakness in natural gas pricing, EOG plans to further decrease drilling activity on its dry gas resource plays in the second half of 2012," the company said (see related story).

"Through active drilling programs in prior years and 2012 to date, EOG has captured strategic natural gas acreage in the Uinta, Horn River, Barnett, Haynesville and Marcellus plays. When natural gas prices rebound, EOG will hold an attractive portfolio of natural gas resources for future development."

The Baker Hughes U.S. natural gas rig count came in at 498 operating rigs in the week ending Aug. 3, down from 505 the week before and 398 rigs less than the same time a year ago. At the same time the oil rig count grew by 13 to 1,429. That is 398 more rigs than the same time a year ago.

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