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ConocoPhillips San Juan Program Squeezed by Low NatGas Prices
ConocoPhillips, the largest operator in the San Juan Basin, is temporarily suspending its natural gas drilling in the Four Corners region because of low gas prices, a spokesman said Thursday. The news comes on the heels of reports by energy analysts that the gas rig count may only reach 450 this year and not strengthen into 2014.
No wells are being shut in and current output of 1.04 Bcf/d won’t be affected, ConocoPhillips Jim Lowry told NGI. Three rigs had been in operation in the 1.3 million-acre leasehold, which extends through the Four Corners of northwestern New Mexico and slightly into Colorado. There are 10,000 producing gas wells.
“We announced Tuesday that were initiating a temporary suspension of development wells, effective immediately…primarily due to low prices for natural gas,” he said. “We will continue to have a familiar presence in San Juan, and this is not a layoff program.”
Close to 600 employees manage the San Juan operations from Farmington, NM, where the company has two large complexes. “We expect to place roughly 20 people in other positions in the San Juan, another another 20 or so in other Lower 48 operations,” Lowry said.
“We will continue to be the largest producer in the basin, and whenever we can — we don’t know the date yet, whenever prices become economic — we will start up again.” The operator has no plans to lay down rigs in any other onshore gas area, said Lowry.
With ConocoPhillips temporarily halting its gas development, there would be only two gas rigs in operation in the basin, one by Encana Corp. and another by ExxonMobil Corp. subsidiary XTO Energy Inc. Encana is exploring the potential of producing oil from the basin’s Mancos Shale, and it is preparing to add a second rig.
The summer market for natural gas has improved for producers, but there are obstacles still in play, according to an analysis by Raymond James & Associates Inc. In a note last week, the analysts, led by J. Marshall Adkins, said the higher U.S. price for natural gas bodes well for gas drillers. Improved prices “will hold up for the next several years and drive a very slow recovery in natural gas drilling. If oil prices fall in 2014, like we expect, the move back to gas could accelerate.”
Front-month Henry Hub natural gas prices over the past five years “have remained rangebound somewhere between $2.00-4.00/Mcf,” Adkins noted. “Over this same time frame, the gas-directed rig count has fallen by 1,180 rigs (or nearly 75%) to 420 rigs from of a peak of 1,600 — all while domestic gas production has continued to effortlessly grow.”
Prices have moved higher, led by additional weather-driven gas demand, which in turn has resulted in a big reduction in the gas storage overhang. “Has the ‘all clear’ bell been rung?” asked analysts. “Not necessarily.”
The summer gas market “has improved for the better and is likely to limit further declines.” However, there are caveats: domestic gas supplies continue to increase “seemingly without even trying,” in part because of more associated output from oil wells; gas is behind the pipe in some regions, which “can and will come back” when bottlenecks are alleviated; and prices and gas well returns have improved, but they aren’t as good as oil drilling returns.
“Accordingly, we expect the gas-directed rig count will improve modestly over the next 18 months and average 433 rigs during 2013, up over 50 rigs from our previous 378 gas rig forecast, but still down 123 rigs from last year’s 556 average active gas rigs,” said Adkins and his colleagues.
Analysts don’t expect the gas rig count to return “anywhere near” the all-time highs, but the recent price rally “could prompt a mild resurrection of activity in some of the dry gas markets — particularly the Marcellus. With the last two weeks’ net 11 gas rig add (per Baker Hughes) in mind, it wouldn’t surprise us to see more gas rigs coming back to work over the next few months.”
For U.S. oil rigs, the domestic count should “drift slowly lower” this year and next in part because of technology and in part to balance the market, according to Raymond James. A review of data now is forecasting that the average oil rig count will fall by 170 this year to average 1,749 active rigs because of three things: early 2013 drilling activity has recovered more slowly than expected; a switch to horizontal from vertical rigs means fewer rigs are needed; and a shift to pad drilling from leasehold drilling also means fewer rigs.
“Next year, our more bearish crude price outlook leads us to establish a 2014 U.S. rig forecast of 1,650 average active rigs, which is down another nearly 6% (or 100 rigs) versus 2013,” wrote Adkins. “Eventually, drilling activity needs to slow at some point in order to balance the oil market, and lower oil pricing is the mechanism to get you there.” The 2014 average U.S. onshore rig count forecast now is 1,650, which would be 6% lower on average than in 2013.
Raymond James’ team is bearish, but “actual drilling activity has fallen short of even our expectations.” Schlumberger Ltd. CEO Paal Kibsgaard noted the same in a speech last month, saying U.S. onshore customers were adding fewer rigs than anticipated (see NGI, March 25).
The “Big 3” plays — the Permian, Bakken and Eagle Ford — “will likely represent the largest absolute decline in oil rigs, the more marginal plays such as the Midcontinent region will likely fall in the largest percentage terms,” said Raymond James analysts. “Looking outside the 14 major basins, we expect that these smaller, more mature reservoirs represent the highest breakeven and as such will likely take a greater percentage cut in drilling rig activity.”
Raymond James expects the Permian vertical rig count to fall 45 rigs, from its current level of 278, to 234 by the end of 2013. Meanwhile, Permian horizontal activity is forecast to grow by 10 rigs, to 185 from 175. “This trend should continue in 2014 with another 35 horizontal (to 220 total horizontal)” as operators become more in tune with the play.
In addition, pad drilling “is still in early innings,” but operators are moving toward it rapidly, noted the analysts. “By doing development drilling from a pad, operators significantly reduce rig moving times. By reducing moving times, pad drilling can decrease total drilling times from 10-40%, depending on well depth. That means increased wells drilled per rig (or fewer rigs per well drilled).”
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