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Drilling Down for More Transparency

With persistently low prices and a production glut, U.S. natural gas markets are in flux. Keeping track of the ups and downs in production data, as rigs move to more oily plays, which in turn affects output and pipeline capacity, can be a challenge for market forecasters.

A production model used by one Houston company claims to bring all the moving parts together to more transparently forecast those future production levels.

"It's definitely different now than it was five years ago," Randall Collum, president of Spring Rock Production LLC, said in an interview with NGI. "We face several big issues in our forecasting efforts. The primary issues are producers choking back production and backlogs of uncompleted wells. Producers are very savvy and are constantly looking for ways to improve the economic efficiency of their wells. It is important for us to understand how they are thinking about initial flow rates versus ultimate reserve recovery in order to properly utilize type curves, especially in the prolific Haynesville Shale."

Determining where the "breakeven" rig count is a "moving target. So much depends on where the rigs are running. 500 rigs in the Haynesville can meaningfully impact gas production growth, whereas 500 rigs running in the Permian would have very little effect on growth. It's all about the mixture of where rigs are running."

With no "transparent data" on North America's gas markets, Collum worked to create what he hopes is an accurate model. It's the basis for Spring Rock Production LLC, a forecasting service he launched in Houston four months ago. He drew on his six years' experience as operations team leader for BP plc's Wamsutter gas field in Wyoming. More recently he spent about five years as a vice president for strategic analysis at Merrill Lynch Commodities Inc.

Spring Rock's forecasting system uses current regional prices from 40 points in the United States and from three in Canada, in combination with well economics, to forecast gas and oil rigs. Those figures in turn generate estimates of oil and gas production over a period of time when forward prices are incorporated into a producer's strategy.

Spring Rock now has teamed with Houston-based Waterborne Energy, which evaluates LNG markets. As an affiliate Spring Rock can share resources and clients.

"I started the company in order to help E&Ps, oil and gas service companies, utilities and commodity trading companies better understand the natural gas production landscape," Collum explained.

Data used for the forecasting models is gathered from industry contacts and providers that provide production and drilling permit numbers. Spring Rock then calibrates the data to create "type curves" for the wells in each of the individual regions -- to see what is actually going on "in the ground," said Collum.

Using forward gas and crude prices and well economics helps to predict how the rigs will react, he said.

The day-to-day swings in prices, correlated with the week-to-week changes in the rig count, make forecasting a constantly moving target. And it's all about determining where a producer is drilling and how big that producer may be. Yes, more gas rigs are moving into oil plays, which will lead to more "gas-to-oil competition," Collum said. And "a lot of the gas is economic. However, these smaller companies have a certain capital budget...Some don't have oil and liquid plays, and that also can really affect the gas rig count."

According to Collum, U.S. gas production should grow "through next year at least. Quite a bit is still coming online from the Marcellus, where they are waiting on gathering systems to come online." By 2013 and into 2014 unconventional gas production "will not be growing nearly as much...it should start to decline a bit by then."

But prices are expected to remain at about $5/Mcf "for the next couple of years," he said. "I definitely think prices will rebound in the long-term, especially if more rigs are going to oil plays. But even some of the rigs now in the liquids produce a lot of gas. It's just that the Granite Wash, the Eagle Ford are not nearly as big as the Haynesville Shale."

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