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Barclays: Associated Gas Bolsters Dry Gas Production

Despite the fact that rig counts have fallen across the shale basins, analysts at Barclays Capital said they believe that associated gas production will continue to grow to offset a portion of the decline in production from dry gas drilling.

To get a clearer picture of drilling activity, the analysts set out to determine how many rigs are contributing to the growth in associated gas production.

"We believe that this can be broken down into two pieces: the number of oil rigs that add to associated gas production, and the number of gas rigs that target NGLs [natural gas liquids], which are adding to associated gas production as well. The latter is the nontransparent one, since producers are not required to categorize their gas rigs as targeting for NGLs or dry gas," Barclays analysts said in a note published last Tuesday.

They pointed out that they expanded the traditional definition of "associated gas" to include dry gas that is produced from NGL-rich wells as well as wells that are targeting oil. The Barclays effort included an updated analysis of Smith Bits rig count data for the main shale plays as well as a categorization of counties where drilling is taking place as wet gas, dry gas and oil.

"...[I]f a county lies mostly in the wet gas window, we consider the county as an NGL-focused county. If most of the acreage lies in the dry gas window, we count it as a dry gas county," Barclays said. Admitting that their estimates might not show the most accurate portrayal of the historical rig count breakdown, the analysts said they believe dry gas-focused rigs are 45% of the total gas rig count while the remainder are targeting NGLs.

"In September 2009, the dry gas rig count in our sample was about 60% of total gas-directed rigs; however, that share has fallen to about 45% of the gas-directed rigs (189 out 420 rigs)," they said. "We could not make a sweeping statement about the gas rig count outside of our sample in 2009, but through our conversations with producers, we believe that it would be very hard to find a significant amount of dry gas-targeted rigs outside of our sample in today's world."

The dry gas-focused estimate sounds high, the analysts admitted and offered support for the number. "Much of the Marcellus dry gas reservoir remains economical for producers even at today's prices, spot or on the forward curve (calendar 2013 at $3.50-3.60/MMBtu)," the analysts said. "The Marcellus dry gas rig count, although falling significantly compared with historical highs, is still about 37% of the total number of estimated dry gas rig count in the country (189)."

Smaller producers might not have liquids or oil targets in their acreage and are left with dry gas drilling, the analysts said. "Some of the dry gas drilling in areas such as the Barnett and Haynesville continues to be driven by producers' efforts to hold acreage by production. The gas rigs provide producers an optionality to develop the fields in a better price environment."

The share of liquids-directed rigs in the Eagle Ford, Barnett and Marcellus shales has grown from 20% in September of 2008 to 45% in September 2012, Barclays said. The dry gas rig count in the Eagle Ford is now a single digit number after declining from about 30 rigs in the second half of last year. "In the Barnett Shale, on the other hand, gas rigs in the combo plays have dropped to single digits recently, indicating that perhaps producers have even slowed down the development of the liquids-rich areas in the basin," Barclays said.

NGL-directed rig counts have been falling, too, particularly where there are nearby oil targets, which are more attractive than NGL wells. "As producers find more attractive shale oil plays with better economics than NGL plays, we believe that the shift to oil will continue," Barclays said. "The momentum in oil rig growth has slowed as producers most likely have shifted rigs to the closest oil plays and may take some time to shift to the ones further away, such as the Bakken."

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