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Barclays: 'Rapid Declines' in Barnett Shale Taking Hold

The current number of well completions, active rigs and aggregate decline rates in the Barnett Shale of Texas are inexact at this point, but all signs point to "rapid declines taking hold soon," according to a review of the play by Barclays Capital energy analysts.

Barclays analysts James Crandell, Biliana Pehlivanova and Michael Zenker in a note to clients studied data about the Barnett Shale to figure out how and why the play has changed the face of natural gas drilling in North America. They also considered what effect the swift gas rig decline in the region may have on U.S. gas production volumes.

"We have noted that the nationwide gas rig count has fallen precipitously, from 1,606 at its peak to 916 in the most recent measurement, a staggering decline of 43%," said the trio. "In Texas, the rig count has fallen even more sharply, from a high of 958 to just 480 last week, a decline of 50% in only six months. In the core Barnett districts 5 (Johnson and Tarrant counties) and 9 (Wise and Denton counties), rig counts have fallen 41% and 55%, respectively."

The state's rig count is now at levels comparable to January 2004, and "in the combined Barnett districts, rig counts have not been so low since September 2005," said the analysts. "Fewer well completions will almost certainly result from lower drilling activity, and when combined with plateauing IP [initial production] and steep decline profiles, the production pullback should be swift and observable."

The Barnett Shale, which is the "poster child" for shale drilling, was one of the "first and also most successful shale formations to be exploited," the analysts noted. To review the production curve since the Barnett began to be exploited around nine years ago, the analysts reviewed data from the Railroad Commission of Texas, which oversees the state's energy industry.

"The experience in the Barnett provides a window into the resource potential in other shale gas plays in the U.S. and Canada," wrote Crandell and his colleagues. "Indeed, developers have turned their attention to other shale formations, intending to replicate the success in the Barnett. Early signs from other shales suggest that the rapid growth in production in the Barnett can be realized in other formations, although paced by the size of the formation and the attractiveness of market prices."

By perfecting horizontal drilling techniques in the Barnett Shale, producers actually saw IP rates increase. When the play's output first began to soar in 2002, drilling rates were "noisier" until a solid base of production was established. In recent years, however, the analysts discovered that by adding "many high-IP, steep-decline wells" output grew above overall production declines.

"In our view, the lesson to be learned from all of this is that production is atop a steep precipice in the Barnett," said the Barclays team. "As producers added incremental supplies over the past several years through higher IPs, growth could take a sharp turn south due to decline rates if not maintained through further drilling."

The Barclays analysis confirms one by EOG Resources Inc., which is one of the Barnett's biggest operators. EOG CEO Mark Papa said last month that internal company models indicated the play's total gas output "will peak at about 4.9 Bcf/d in the first quarter, and by the end of this year the Barnett Shale will be down to about 4.3 Bcf/d, a drop of about 600 MMcf/d from its peak" (see Daily GPI, Feb. 6). Even with an inventory of wells to be completed by all of the operators, "we don't think it will go to 6 Bcf/d, and the first quarter will be the apogee..."

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