Natural gas at $11/Mcf is "kind of like a Saturday night drunk," Devon Energy Corp. Chairman Larry Nichols said Tuesday. "It may feel good at the time," but it isn't sustainable.
Nichols spoke on the opening day of the Unconventional Gas International Conference and Exhibition in Fort Worth, TX. He shared the opening keynote panel with Range Resources Corp. COO Jeff Ventura and Kathryn Klaber, executive director of the Marcellus Shale Coalition.
Double-digit gas prices are too high to last but today's price, which is lower than $4/Mcf, is too low for the industry to maintain gas production long term, Nichols said.
Despite the current gas glut, U.S. gas producers continue to drill, particularly in the big gas shales, such as the Barnett, Marcellus and Haynesville, the Devon chief noted.
"We've been ignoring the free market," Nichols said. The free market is "sending us a very powerful signal" that the gas market is oversupplied.
Nichols understands why producers continue to drill, mirroring comments made by other producers and energy analysts. Drilling activity has been sustained to retain leases, by hedging contracts, by joint venture agreements that mandate a specific level of drilling, and by Wall Street's willingness to loan money to the industry.
Nichols believes domestic gas drilling inevitably will drop after enough wells have been drilled either to hold leases or let them go, after hedging contracts expire, and after Wall Street grows "weary of funding undisciplined growth."
What is the ideal price? Stable prices in a range of $5 to $7/Mcf "would probably work in most basins" to sustain healthy drilling levels, said Nichols.
Ventura agreed. He said "a lot of gas could be developed" with gas prices of $5-7. Most of the shale basins require a gas price of about $5/Mcf, even with the achievements in technology and efficiency, he said.
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