A week after Chesapeake Energy announced it would shut in some of its gas production until prices improve (see NGI, Oct 2), Questar Corp. subsidiary Questar Exploration & Production Co. last week announced a similar move, shutting in a portion of its unhedged Rockies production in response to low prices.
Analysts told NGI that given Questar’s circumstances, which make it relatively easy for it to shut in at least some wells, the move was not a surprise. However, it’s unlikely other producers will be joining Chesapeake and Questar given difficulties most would face in shutting in wells.
Effective Oct. 1, Questar shut in approximately 32 MMcf/d of net production (approximately 70 MMcf/d gross) from its Rocky Mountain producing region. On a net basis the shut-in volume equals about 1 Bcfe or 2.3 Bcfe gross for the month of October.
The answer to the question why would Questar shut in a portion of its unhedged production goes something like, “because it can.”
Katie Elder, senior director with R.W. Beck, told NGI that Questar is in a unique position. The company owns most of its production, so it doesn’t need the consent of other working interest holders before deciding to shut in at least some of its wells. Elder noted that the Rockies is where prices have been the lowest, below $3 in some cases. And additionally, storage is full. “They’re the folks I would expect to shut in,” Elder said.
“They’re in a unique position, I think, relative to a lot of other people,” Elder said. “They’re the folks I would expect to [shut in]. It’s Rockies production. Their storage is full; they’ve got no place else to put the gas. It’s production they control, and they probably don’t have any other joint owners involved in those wells. That’s one of the things that makes shutting in hard for a producer is that you have to get all of the entities with the differing royalty interests to agree.”
The analyst said the industry might see “a few more folks here and there” shutting in production, but she said she is generally very skeptical of talk of price-driven producer shut-ins. After all, any revenue is better than none. And in order to shut in a well most producers need the consent of multiple partners who each may have different economic circumstances.
“It takes extraordinary circumstances to really get somebody to follow through and actually shut in,” Elder said. “And Questar, in particular, is in this unique position where they don’t have to deal with some of those issues.”
As for Questar’s decision, Elder said it was “absolutely” prudent. Questar did not respond to an interview request from NGI.
“I wasn’t surprised; it’s just that you have no way of telling which operator would do it,” Canaccord Adams analyst Irene Haas said of Questar’s decision to shut in some Rockies production. “I think it’s actually somewhat expected considering the storage position that we are in now, and I think in the long run it’s actually a very healthy exercise for the ultimate balance of the natural gas market in North America.”
Haas said she thinks Questar’s decision was motivated more by the fact that storage caverns are full than by the fact that Rockies prices are particularly low. “Secondarily, you want to look at the Rocky Mountain price differential, too. It’s been pretty wide, so that somewhat explains what Questar’s doing, which is totally rational.
“It’s kind of interesting because in the same breath that they say they’re going to be cutting production for the month of October, their full-year guidance actually went up.”
In a Sept. 27 research note, Haas wrote that Canaccord Adams lowered its price assumptions for WTI crude and Henry Hub natural gas “to be more in line with the recent Nymex forward strip prices and to reflect what we consider weaker market conditions, driven by relatively high inventory and a benign hurricane season in the Gulf of Mexico.”
The firm cut its natural gas estimate to $6.75/MMBtu from $7.30 for 2006 and to $7.75/MMBtu from $9.00 for 2007. The WTI estimate was cut to $68/bbl from $70 for 2006 and 2007.
Despite the temporary shut-in, Questar E&P raised 2006 total production guidance to 127-129 Bcfe, up from previous guidance of 126-128 Bcfe, the company said. Both current and previous production guidance includes 1 Bcfe of previously disclosed positive accounting adjustments composed of 0.7 Bcfe related to settlement of a gas imbalance and 0.3 Bcfe related to a change in ownership. Excluding the adjustments, the revised production guidance represents 10% to 12% growth over 2005 production of 114.2 Bcfe.
Since its July 26 earnings release, the company has also added natural gas hedges for the remainder of 2006 through 2009. The additions include hedges on 1.7 Bcf for the remainder of 2006, 6.9 Bcf for 2007, 7.8 Bcf for 2008 and 20.5 Bcf for 2009.
Oklahoma City-based Chesapeake shut-in of a net 100 MMcf/d of production (125-150 MMcf/d gross), representing the bulk of the third largest independent producer’s unhedged production. As of Oct 1, Chesapeake temporarily shut in unhedged supply in various areas in the southwestern United States until natural gas prices “recover from recently depressed levels.” Chesapeake would not say at what price that supply would be returned to production. The company’s current oil and natural gas production totals more than 1,600 MMcfe/d (91% natural gas), so the shut-in amount represents only about 6% of its net production.
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